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Monday, October 6, 2008

*Stock Analysis: Illinois Tool Works Inc (ITW) In The Buy Zone

This article originally appeared on The DIV-Net September 29, 2008.

Linked here is a PDF copy of my detailed analysis of Illinois Tool Works Inc (ITW). Below are some highlights from the above linked analysis:


Company Description: Illinois Tool Works Inc. is a diversified manufacturer operates a portfolio of about 750 industrial and consumer businesses located throughout the world.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
ITW is trading at a discount to 1.), 2.) and 3.) above. If I exclude the high and low valuations and average the remaining two, ITW is trading at a 14.8% discount. ITW earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.
ITW earned one Star in this section for 3.) above. ITW has paid a cash dividend to shareholders every year since 1933 and has increased its dividend payments for 45 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
  1. NPV MMA Diff.
  2. Years to >MMA
ITW earned one Star in this section for 1.) above. The NPV MMA Diff. of the $5,172 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as ITW has. If ITW grows its dividend at 11.8% per year, it will take 9 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%.

Other: ITW is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. ITW has a strong balance sheet with a relatively low debt and generates high levels of free cash flow relative to net income. Looking ahead, ITW should continue to grow EPS via acquisitions and share repurchases. Risks would include a downturn in industrial activity and/or capital spending, integration of acquisitions and continued escalation of raw material costs..

Conclusion: ITW earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a net total of three Stars. This quantitatively ranks ITW as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $47.29 before ITW's NPV MMA Diff. decreases to the $3,000 NPV MMA Diff. that I like to see. At that price ITW would yield 2.43%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the $3,000 NPV MMA Differential I'm looking for, the calculated rate is 10.4%. This dividend growth rate is slightly below the 11.8% used in this analysis.

All things considered, I would be very comfortable initiating a position in ITW below $47.29.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I had no position in ITW (0.0% of my Income Portfolio) .

What are your thoughts on ITW?

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