Three Dividend Aristocrats That Are Returning More Cash To Their Shareholders

Illinois Tool Works Inc. (ITW) is a large industrial conglomerate that has about 85 divisions categorized into seven operating segments including Automotive OEM, Test & Measurement and Electronics, Food Equipment, Polymers and Fluids, Welding, Construction Products, and Specialty Products. Below we briefly review the different business segments. Illinois Tool Works is Dividend Aristocrat having raised its dividend for 45 straight years. The company recently raised its dividend by 7% to $1.07 per share quarterly from $1.00 per share. The forward dividend yield is roughly 2.8%. The growing dividend is supported by top and bottom line growth. Revenue has increased from $13.88B in 2009 to $14.77B in 2018 while simultaneously EPS has grown from $1.93 to $7.60. The dividend is well covered from the perspective of EPS and FCF. The forward payout ratio is reasonable at ~56% based on a dividend of $4.28 and estimated 2019 EPS of $7.66, which is below my threshold of 65%. From a cash flow perspective, the dividend costs $1.12B and FCF was $2.62B giving a dividend-to-FCF (TTM) ratio of ~43%, below my criteria of 70%. Illinois Tool Works’ debt load has come down after several years of increasing to a peak of $0.85B in short-term debt and $7.48B in long-term debt in 2017. The company currently has no short-term debt, $1.35B in the current portion of long-term debt and $6.03B in long-term debt that is offset by $1.5B in cash and cash equivalents. The debt-to-equity ratio is 1.85, which is below my threshold of 2.0. Interest payments are well covered with a coverage ratio of 14.3 meaning the company can pay its obligations. Illinois Tool Works is currently facing headwinds from tariffs, trade friction, and slowing global automotive and residential markets. From a valuation perspective the company is trading a forward P/E ratio of ~19.3 based on expected 2019 EPS. This is below the 5-year average of ~22.3 but above the 10-year average of ~18.0. So, the stock is about fairly valued at the current P/E multiple.

PPG Industries, Inc. (PPG) is the largest global manufacturer of paints and coatings. The company sells to the aerospace, automotive, construction, industrial, and packaging markets. The company has two operating segments: Performance Coatings and Industrial Coatings. PPG has significant exposure to the new car auto market. PPG has raised the dividend for 47 consecutive years making the company a Dividend Aristocrat. Furthermore, PPG has paid a dividend since 1899. The company recently announced a ~6% or $0.12 per share increase to $1.98 per share in 2019 from $1.86 per share in 2018. Despite the increase, the forward yield is still low at ~1.8%. near the S&P 500’s average yield of ~1.9%. Revenue and EPS growth support the rising dividend. Revenue has increased from $12.24B in 2009 to $15.37B in 2018 while EPS has grown from $1.02 to $5.89 in the same time period. The dividend is well covered with a payout ratio of 31.3% based on expected 2019 EPS of $6.26. In addition, the dividend-to-FCF ratio is roughly 42% based on a dividend requirement of $0.45B and FCF of $1.06B. These values are below my threshold criteria of 65% and 70%, respectively. Furthermore, PPG makes conservative use of debt with only $0.65B in short-term debt and $4.85B in long-term debt that is offset by $1.02B in cash, cash equivalents, and short-term investments at the end of Q2 2019. Debt is not onerous as the D/E ratio is only 1.23 less than my target of 2.0, and interest coverage is over 13X. The company also has sufficient liquidity with a quick ratio of about 0.92 and current ratio of 1.43. Overall, PPG is a high-quality dividend grower. Furthermore, the company’s P/E ratio (FWD) is 17.6, which is less than the 5-year average of ~26 and slightly less than the 10-year average of 19.8. The stock is somewhat undervalued. But saying that, PPG has exposure to the cyclical automotive and construction industries, and the global automotive industry is slowing. Taking this into account and the comparatively low yield this is a stock to keep on a watch list at the moment.

Dover Corporation (DOV) is medium-sized industrial conglomerate that operates globally. The company reports three business segments: Engineered Systems, Fluids, and Refrigeration and Food Equipment. Dover is a Dividend King making it one of only 28 companies out of a universe of over public companies that has raised their dividend for over 50 straight years. Notably, Dover has raised the dividend for 63 straight years and only one company, American States Water, has raised the dividend continuously for a longer period of time. Dover recently increased the dividend 2.1% to $0.49 per share per quarter. The forward yield is low at roughly 2.2%. The growing dividend is support by generally increasing revenue over long periods of time although there is year-to-year volatility. Revenue increased from $5.78B in 2009 to $6.99B in 2018. Concurrently, EPS increased from $2.00 in 2009 to $4.09 in 2018. Volatility in both the top and bottom lines should be less after the spinoff of the energy business, Apergy in 2018. The dividend is well covered with a forward payout ratio of 33.6% based on expected 2019 EPS of $5.83. In 2018, FCF of $0.63B more than covers the dividend requirement of $0.28B giving a ratio of 45.1%. The balance sheet is reasonable with D/E ratio of 1.12 and interest coverage of ~7.0X.  Short-term debt is $0.22B and long-term debt is $2.94B but this is offset by $0.40B in cash and cash equivalents. From a valuation perspective, the P/E ratio FWD is about 15.7, which is lower than the 5-year average of 19.1 and the 10-year average of 16.2. The stock is somewhat undervalued. But Dover has exposure to cyclical industries and the business cycle is late. This combined with the slowdown in worldwide industrial activity suggest that one should keep this stock on watch lost for now.

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