Investors who want to cash in on Illinois Tool Works Inc.’s (NYSE:ITW) upcoming dividend of US$1.00 per share have only 2 days left to buy the shares before its ex-dividend date, 28 December 2018, in time for dividends payable on the 10 January 2019. What does this mean for current shareholders and potential investors? Below, I will explain how holding Illinois Tool Works can impact your portfolio income stream, by analysing the stock’s most recent financial data and dividend attributes.
5 questions to ask before buying a dividend stock
If you are a dividend investor, you should always assess these five key metrics:
- Is its annual yield among the top 25% of dividend-paying companies?
- Does it consistently pay out dividends without missing a payment of significantly cutting payout?
- Has the amount of dividend per share grown over the past?
- Can it afford to pay the current rate of dividends from its earnings?
- Based on future earnings growth, will it be able to continue to payout dividend at the current rate?
How well does Illinois Tool Works fit our criteria?
The current trailing twelve-month payout ratio for the stock is 60%, which means that the dividend is covered by earnings. However, going forward, analysts expect ITW’s payout to fall to 50% of its earnings. Assuming a constant share price, this equates to a dividend yield of 3.4%. However, EPS should increase to $7.95, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.
When considering the sustainability of dividends, it is also worth checking the cash flow of a company. A company with strong cash flow, relative to earnings, can sometimes sustain a high pay out ratio.
If there is one thing that you want to be reliable in your life, it’s dividend stocks and their constant income stream. ITW has increased its DPS from $1.24 to $4 in the past 10 years. During this period it has not missed a payment, as one would expect for a company increasing its dividend. This is an impressive feat, which makes ITW a true dividend rockstar.
Compared to its peers, Illinois Tool Works generates a yield of 3.4%, which is high for Machinery stocks but still below the market’s top dividend payers.
Taking into account the dividend metrics, Illinois Tool Works ticks most of the boxes as a strong dividend investment, putting it in my list of top dividend payers. Given that this is purely a dividend analysis, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. There are three relevant aspects you should further research:
- Future Outlook: What are well-informed industry analysts predicting for ITW’s future growth? Take a look at our free research report of analyst consensus for ITW’s outlook.
- Valuation: What is ITW worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether ITW is currently mispriced by the market.
- Other Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.