Dividend Kings are companies known for increasing their dividend payouts for at least 50 consecutive years, offering appealing options for investors seeking dependable passive income. However, not all Dividend Kings consistently enhance their dividends significantly, and some may face challenges that could threaten future dividend increases.
Illinois Tool Works Inc. (ITW), commonly referred to as ITW, has established itself as a significant player in passive income generation by continuously raising its quarterly dividends for 61 years and more than tripling this dividend over the past decade. Recently, ITW announced its full-year 2024 results and provided its outlook for 2025.
ITW operates as an industrial conglomerate with numerous brands under seven segments: automotive original equipment manufacturing, construction products, food equipment, polymers and fluids, specialty products, test and measurement and electronics, and welding. Unlike other conglomerates, ITW employs a flexible business model driven by customer needs, fostering new product development. The company’s customer-back innovation (CBI) strategy allows it to cater to evolving market demands, such as developing automotive components for diverse vehicles and environmentally-friendly products. This approach has contributed to margin improvements, particularly within the welding segment, ITW’s highest-margin division.
In 2024, ITW invested approximately $800 million to bolster long-term growth across its primary business units, with plans to accelerate CBI investments in the coming years. The company also increased its patent filings by 18% during the year as part of its innovation strategy aimed at addressing customer challenges.
Over the past 15 years, ITW has more than doubled its operating margins by cultivating a culture focused on operational efficiency and profitability over sales. In 2024, margin growth in six of its seven segments resulted in record operating margins of 26.8%. The company expects its enterprise initiatives to drive an additional 100-basis-point increase in margins for 2025.
ITW’s margin expansion aligns with its goals for 2030, which include achieving 30% operating margins, 4% annual organic growth, a 7% raise in annual dividends, 9% to 10% average annual earnings-per-share growth, and 100% free cash flow conversion. Illustrating its financial health, ITW raised its dividend by 7% in the previous year and converted 100% of net income to free cash flow. In 2024, ITW returned $3.2 billion to shareholders through $1.7 billion in dividends and $1.5 billion in stock buybacks, a program expected to continue in 2025 supported by free cash flow.
Despite robust margins and a significant capital return program, ITW anticipates organic growth of 0% to 2% in 2025 and forecasts GAAP earnings per share of $10.15 to $10.55, including a $0.30 per share foreign currency headwind. Excluding certain items, the 2024 EPS was $10.15, indicating limited short-term growth. As of the current share price of $258.11, ITW trades at a 24.9 price-to-earnings ratio based on the midpoint of its 2025 guidance, a somewhat high valuation for a Dividend King.
During an earnings call, ITW’s management discussed a wider industry slowdown, noting that the downturn has persisted for six to eight quarters, aligning with the typical length of a cyclical slowdown. However, the company is prepared to quickly adapt, whether for a potential demand rebound or necessary pricing adjustments due to tariffs. CEO Christopher O’Herlihy emphasized ITW’s decentralized structure and ability to rapidly respond to market changes due to decision-making being closely tied to customers.
ITW’s organizational framework allows it to adeptly manage market cycles, with its 84 divisions spread across seven segments, each contributing between 11% and 17% of the 2024 operating income. This diversification prevents overreliance on any single segment, making ITW resilient to downturns in specific markets.
While ITW may not be the cheapest stock in its category, with a dividend yield of 2.3%, it remains a robust enterprise that consistently achieves its commitments to investors, including growing operating margins and capital returns backed by free cash flow. Over recent years, the company has demonstrated its capability to maintain dividend growth and stock repurchases even during market slowdowns. Management has prepared for prolonged downturns or tariff increases but remains agile enough to benefit from potential recoveries.
Ultimately, ITW presents a worthwhile investment opportunity for those comfortable with its premium valuation, representing a high-quality business.
