We recently published a list of 12 Best Industrial Dividend Stocks to Invest in Now. In this article, we are going to take a look at where Illinois Tool Works Inc. (NYSE:ITW) stands against other best industrial dividend stocks to invest in now.
Industrial stocks play a crucial role in economic growth, encompassing a wide range of businesses, from manufacturing to transportation. This sector often performs well during periods of economic expansion and stands to gain from higher government investment in infrastructure projects. Although the sector is diverse, companies within it exhibit common characteristics and are positioned to benefit from several overarching trends. These factors contribute to the view that industrials play a significant role in the equity portion of a well-diversified portfolio.
In recent years, the industrial economy has generally experienced improving demand trends, though certain areas, such as manufacturing automation, have shown signs of weakening. A report by Edward Jones suggested that while the recovery is expected to continue, several near-term uncertainties could impact the sector’s growth. These include a potential slowdown in economic expansion, ongoing geopolitical challenges, and declining business and consumer confidence.
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Additionally, the growing risk of a global trade war between the United States and key trading partners has introduced further uncertainty for the industrial sector. While the administration has announced tariffs on materials such as steel and aluminum, the full impact of these measures remains unclear. Further tariff actions are anticipated, with a likely focus on China and the European Union. In response, these regions are expected to retaliate through tariffs or other policy measures.
In 2024, the industrial sector delivered solid returns overall, though it slightly trailed the broader market in what was a strong year for stocks. A report by Fidelity Investments noted that industrials started the year on a strong footing, generally keeping pace with the broader market through April. However, the sector underperformed in May and June before rebounding in July, emerging as one of the market’s stronger segments. It largely maintained those relative gains through mid-December. This uneven performance reflected a balance between optimism surrounding a potential soft landing for the US economy and a surge in major construction projects, contrasted with concerns over weak manufacturing indicators and historically high stock valuations.
The Fidelity report also highlighted several key themes that could present investment opportunities in the coming year. One of the primary themes is the resurgence of manufacturing within the United States. Various factors are driving an unprecedented wave of reinvestment in domestic infrastructure, efforts to onshore supply chains to mitigate geopolitical risks, and increased investments in electrification and artificial intelligence development.
The cyclical nature of industrial stocks has contributed to strong performance over time. Over the past three years, the market’s Industrial Index has slightly outpaced the broader market, driven by solid growth across several key industries, including Aerospace & Defense, Building Products, Machinery, and Electrical Equipment. This year, as stocks have been in negative territory for a while now, the industrial sector has recorded a 0.74% decline, while the broader market has fallen by nearly 3%.
Our Methodology
For this article, we first scanned Insider Monkey’s database of over 1,000 hedge funds, as of the fourth quarter of 2024 and selected industrial companies across various segments within the industry, including manufacturing, construction, aerospace and defense, machinery and equipment, transportation and logistics, as well as utilities. From this pool of companies, we identified 12 dividend companies and ranked them in ascending order of the number of hedge funds having stakes in them at the end of Q4 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
A factory in operation, its machinery humming as new industrial products get built.
Illinois Tool Works Inc. (NYSE:ITW)
Number of Hedge Fund Holders: 49
Illinois Tool Works Inc. (NYSE:ITW) is a diversified industrial company operating across seven key segments, including automotive original equipment manufacturing, construction products, food equipment, polymers and fluids, specialty products, test and measurement and electronics, and welding. In 2024, the company allocated approximately $800 million to drive long-term expansion within its core business areas and aims to further accelerate its customer-back innovation (CBI) investments in the years ahead. As part of its commitment to innovation and solving customer challenges, the company also increased its patent filings by 18% during the year.
In the fourth quarter of 2024, Illinois Tool Works Inc. (NYSE:ITW) posted revenue of $3.9 billion, down 1.28% from the same period last year. The revenue also missed analysts’ estimates by over $50 million. However, the company’s GAAP earnings per share (EPS) rose 7% to $2.54. Its operating margin improved to 26.2%, reflecting a 140-basis-point increase, with enterprise initiatives accounting for 120 basis points of the gain.
Illinois Tool Works Inc. (NYSE:ITW) is one of the best industrial dividend stocks with a solid cash position. In the most recent quarter, the company generated $1.1 billion in operating cash flow, while free cash flow reached a record $1 billion, reflecting a 10% increase and a conversion rate of 133%. For FY25, the company expects free cash flow to exceed net income and intends to buy back around $1.5 billion worth of its shares. The anticipated effective tax rate is estimated to range between 24% and 24.5%.
Illinois Tool Works Inc. (NYSE:ITW) currently offers a quarterly dividend of $1.50 per share and has a dividend yield of 2.34%, as of March 17. In 2024, the company extended its dividend growth streak to 52 years.
Overall, ITW ranks 8th on our list of best industrial dividend stocks to invest in now. While we acknowledge the potential of ITW as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for a deeply undervalued dividend stock that is more promising than ITW but that trades at 10 times its earnings and grows its earnings at double digit rates annually, check out our report about the dirt cheap dividend stock.
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Disclosure: None. This article is originally published at Insider Monkey.
