We recently compiled a list of the 20 Worst Dividend Aristocrat Stocks According to Analysts. In this article, we are going to take a look at where Illinois Tool Works Inc. (NYSE:ITW) stands against the other dividend aristocrat stocks.
Dividend aristocrats are companies that have raised their dividend payouts for at least 25 consecutive years. Achieving and maintaining a dividend streak this long is a tough nut to crack. That is why, among the approximately 6,000 stocks listed on the NYSE and NASDAQ, only around 67 companies have earned the distinction of being called dividend aristocrats. This strong dividend growth track records imply that these companies were financially stable enough to sustain their payouts during two significant financial crises: the Great Financial Crisis of 2008 and the COVID-19 pandemic. Besides this, these companies have also shown strong performance relative to the broader market over the years. The Dividend Aristocrat Index has outperformed the wider market with lower volatility since its inception in 2005. Recently we covered the list of the 25 Best Dividend Aristocrats to Buy according to Wall Street analysts.
Analysts have closely observed the performance of dividend aristocrats in the past and in recent times. In a January 2019 blog post titled ‘Dividend Growth Strategies and Downside Protection’, Phillip Brzenk, global head of multi-asset indexes, analyzed how dividend growth strategies perform, particularly in times when the market experiences declines. He said that since the end of 1989, there have been six calendar years when the broader market posted negative performance. Interestingly, in each of these years, the Dividend Aristocrats outperformed the broader equity benchmark by an average of 13.28%. Moreover, they managed to achieve a positive total return in three of those challenging years. He further said, the aristocrats outperformed the market in 53% of instances, with an average outperformance of 0.16%, when their performance was observed on a monthly basis.
As mentioned above, dividend growth stocks have performed better than the overall market. Since its inception in 2005 up until September 2023, the dividend aristocrats index achieved a total return of 10.35%, surpassing the broader market’s return of 9.54% during the same timeframe. Additionally, the dividend aristocrats exhibited lower volatility, at 15.35%, compared to the market’s 16.31%. This indicates that the prices of these stocks are more stable and less prone to frequent changes, demonstrating their relative resilience.
That said, analysts are now turning their attention to different aspects of dividend investing. For taxable investors, dividends can be less favorable compared to share repurchases. Additionally, focusing on dividends limits diversification since around 60% of U.S. stocks and 40% of international stocks do not pay dividends. As a result, portfolios that emphasize dividends are significantly less diversified than those that do not consider dividends in their design. Less-diversified portfolios tend to be less efficient due to a higher potential range of returns without any corresponding increase in expected returns, assuming the exposure to common factors remains constant. Moreover, emphasizing dividends often leads to an overinvestment in U.S. equities, causing a home-country bias and further reducing diversification.
According to this analysis, dividends are a tax-efficient method for returning capital to shareholders. However, investors continue to favor these equities due to their solid performance and the reliable income they offer. Although dividend aristocrats are strong companies with consistent dividend growth, some are less favored by analysts due to factors like industry challenges, macroeconomic conditions, and specific business issues.
Our Methodology:
For our list, we scanned a list of the S&P 500 Dividend Aristocrats, companies that have raised their dividends for 25 consecutive years or more. We then ranked these stocks according to their average analyst ratings from Yahoo Finance, where a higher score signifies the worst rating. The “Recommendation Rating” is a way to assess stocks. It uses a scale from 1 to 5, with each number indicating a different recommendation:
1. Strong Buy
2. Buy
3. Hold
4. Underperform
5. Sell
From this ranking, we selected the stocks with scores of 3 or more.
A factory in operation, its machinery humming as new industrial products get built.
Illinois Tool Works Inc. (NYSE:ITW)
Average Analyst Rating Score: 3.5
Illinois Tool Works Inc. (NYSE:ITW) is an American manufacturing company that specializes in consumables and specialty products. The company faced a difficult demand environment across most of its segments in the first quarter of 2024. Its revenue came in at $4 billion, which declined by 1% and its organic growth by 0.6%. The company also operates in the semiconductor and welding industries, which are currently experiencing cyclical challenges. These could affect the company’s revenue growth, potentially causing a decline in its stock price. Illinois Tool Works Inc. (NYSE:ITW)’s welding revenue fell by 3.5% on a year-over-year basis. Analysts have a consensus Hold rating on the stock.
In addition, Illinois Tool Works Inc.’s (NYSE:ITW) debt-to-equity ratio stands at 2.75, significantly above the industry average. This indicates that the company is relying more on borrowed funds, suggesting a higher level of financial risk. The company has approximately $8.33 billion in total debt as of the most recent quarter. The stock has a forward P/E of 22.94, which has doubled since 2012. The stock price has also quadrupled during the same period.
Illinois Tool Works Inc. (NYSE:ITW) has been raising its dividends for 51 consecutive years. The company pays a quarterly dividend of $1.40 per share and has a dividend yield of 2.38%, as of June 14.
In May, Julian Mitchell from Barclays held an Underweight rating on Illinois Tool Works Inc. (NYSE:ITW) with a $230 price target. It is one of the worst dividend aristocrat stocks on our list.
The number of hedge funds tracked by Insider Monkey owning stakes in Illinois Tool Works Inc. (NYSE:ITW) grew to 45 in Q1 2024, from 36 in the previous quarter. These stakes are collectively valued at over $1.55 billion. Among these hedge funds, Fisher Asset Management was the company’s leading stakeholder in Q1.
Overall ITW ranks 11th on our list of the worst dividend aristocrat stocks to buy. You can visit 20 Worst Dividend Aristocrat Stocks According to Analysts to see the other dividend aristocrat stocks that are on hedge funds’ radar. While we acknowledge the potential of ITW as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as ITW but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
