Illinois Tool Works is an American component manufacturer founded in 1912 year. Company is well diversified, operates in 58 countries and employees around 65 000 people.

Main segments:

  • Automotive OEM
  • Test & Measurement and Electronics
  • Food Equipment
  • Polymers & Fluids
  • Welding
  • Construction Products
  • Specialty Products

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Highly diversified business.

Company wants achieve total yearly shareholder returns of around 12-14%:

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As it comes to capital allocation strategy (as % of operating cash flow) – 25% internal investments, 20-30% dividend, 50% external investments

2016 should be good:

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As it comes to financials (estimates):

Market cap ~ $30B

Net debt ~$5B

Payout ratio ~40%

ROE ~30%

Beta = 1.2

Dividend yield 2.7% + huge buyback programs, in 2014 it was 10.9% of capital, during I-IIIQ 2015 $2b repurchase, buyback yield ~ 6.7% (!!), mostly due to divestitures.

 

Estimated valuation ratios:

EV/EBITDA = 10

P/E = 16

 

ITW is one of The Dividend Kings with history of payments since 1964 year. Current dividend yield is around 2.7%, which is nothing special, but huge buyback program should be also taken into consideration. Company generates strong free cash flows and returns them to investors. Surely such big buyback programs are not possible in long term, I assume 1-2% buyback yield in long term. Since 2012 dividend CAGR is 11%, decent result.

 

Drawdown risk analysis:

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ITW business is well diversified which is reflected in share price. Historically drawdowns were not so strong – buying at drawdowns of around 30% was a good choice in long term. Currently drawdown is around 15-20% – it might be a good time, but few more dollars discount and I will be sure that buying is a good opportunity. I am waiting for around $73. At such level it would be 9 times EBITDA and 14 times Earnings, but even for $75 I think I will seriously consider buying.

 

Summing up, I like ITW business for diversity and strong cash generation. I think currently it might be a good time to buy shares but I will patiently wait, maybe special occasion will come sooner… or later.

 

Disclaimer ITW – no position