Stock Analysis

Illinois Tool Works (NYSE:ITW) Will Pay A Larger Dividend Than Last Year At $1.31

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Illinois Tool Works Inc. (NYSE:ITW) will increase its dividend on the 14th of October to $1.31, which is 7.4% higher than last year's payment from the same period of $1.22. This will take the dividend yield to an attractive 2.3%, providing a nice boost to shareholder returns.

See our latest analysis for Illinois Tool Works

Illinois Tool Works' Dividend Is Well Covered By Earnings

If the payments aren't sustainable, a high yield for a few years won't matter that much. Illinois Tool Works was earning enough to cover the previous dividend, but it was paying out quite a large proportion of its free cash flows. The business is earning enough to make the dividend feasible, but the cash payout ratio of 79% indicates it is more focused on returning cash to shareholders than growing the business.

Over the next year, EPS is forecast to expand by 27.9%. If the dividend continues along recent trends, we estimate the payout ratio will be 52%, which is in the range that makes us comfortable with the sustainability of the dividend.

NYSE:ITW Historic Dividend August 11th 2022

Illinois Tool Works Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2012, the annual payment back then was $1.44, compared to the most recent full-year payment of $4.88. This implies that the company grew its distributions at a yearly rate of about 13% over that duration. So, dividends have been growing pretty quickly, and even more impressively, they haven't experienced any notable falls during this period.

Illinois Tool Works Could Grow Its Dividend

Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. We are encouraged to see that Illinois Tool Works has grown earnings per share at 6.6% per year over the past five years. Since earnings per share is growing at an acceptable rate, and the payout policy is balanced, we think the company is positioning itself well to grow earnings and dividends in the future.

In Summary

Overall, we always like to see the dividend being raised, but we don't think Illinois Tool Works will make a great income stock. The company hasn't been paying a very consistent dividend over time, despite only paying out a small portion of earnings. Overall, we don't think this company has the makings of a good income stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 2 warning signs for Illinois Tool Works that you should be aware of before investing. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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Illinois Tool Works

Illinois Tool Works Inc. manufactures and sells industrial products and equipment worldwide.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Future Growth2
Past Performance2
Financial Health3

Read more about these checks in the individual report sections or in our analysis model.

Established dividend payer with mediocre balance sheet.