Illinois Tool Works (ITW) is an Illinois-based, multi-industrial company that has been in business for over 100 years. Founded in 1912, the company has grown exponentially and now operates in more than 50 countries across the globe. With its global presence and wide range of products and services, ITW has become a leader in manufacturing, including the automotive, food equipment, construction and electronics sectors.
The company specialises in providing components to the global manufacturing industry, focusing on technology-driven solutions such as fasteners, welding products, adhesives and electronics. ITW also provides industrial fluid management systems, power transmission components and other speciality items. In addition to its core manufacturing businesses, ITWs also operates services companies that provide financial and consulting services to customers worldwide.
The company strives to create shareholder value through innovation while embracing sustainable growth practices to maintain long-term success. By investing heavily in research and development initiatives, ITW is committed to offering customers the highest quality solutions at competitive prices.
Business Model
The company operates through seven global segments: Automotive; Food Equipment; Test & Measurement Electronics; Polymers & Fluids; Welding; Construction Products, and Specialty Products. Each segment serves a specific market, from automotive components to professional baking equipment to hand tools for construction sites.
ITW’s automotive businesses are the company’s most important segment accounting for roughly 21% of its total sales. This segment is focused on manufacturing components and fasteners for automotive-related parts and providing engineering and consulting services to help customers optimise their products. The company’s automotive segment primarily serves the original global equipment manufacturer (OEM) market. Their engineering teams are constantly innovating new solutions that better suit customers’ changing needs and expectations in the ever-evolving automotive world.
ITW’s food equipment segment is the second-largest segment, accounting for approximately 16% of total sales. Illinois Tool Works is a global leader in the branded commercial food equipment industry. In this segment, ITW focuses on providing professional kitchens with high-quality and reliable equipment that meets the most stringent standard. With over 100 years of experience, it has become one of the most recognisable names in food equipment. ITW’s portfolio includes some of the top brands in the market, such as Hobart, Vollrath, Globe Food Equipment Company and Berkel. The company focuses on providing superior products designed to meet customer needs and provide value-added services and solutions. This strategy has allowed ITW to differentiate itself from other players in this highly competitive sector.
ITW’s Test & Measurement and Electronics segment is the third-largest segment, accounting for approximately 15% of total sales. As one of the leading providers of test & measurement systems and electronic components in the industry, ITW has developed a reputation for producing innovative products trusted by customers worldwide. ITW’s Test & Measurement and Electronics segment designs and manufactures an extensive range of test equipment, from essential handheld tools to sophisticated automated systems used in laboratories.
ITW Speciality Products is the fourth-largest segment, accounting for approximately 14% of total sales. Its Speciality Products segment is focused on manufacturing niche markets products with substantial patent protection for the food and beverage, consumer durables, general industrial, industrial capital goods and printing and publishing industry.
ITW Welding Segment accounts for approximately 11% of total sales. The company’s Welding Segment produces welding equipment, consumables, and accessories for various industrial applications. This segment primarily serves the general industrial market, including fabrication, shipbuilding and other general industrial markets, energy, construction, MRO, automotive original equipment manufacturers and industrial capital goods markets.
ITW Polymers & Fluids segment accounts for approximately 12% of total sales. Businesses in this segment produce engineered adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket maintenance and appearance. Through their superior engineering capabilities, they have developed advanced materials that serve the need of customers in the automotive aftermarket, general industrial, MRO and construction markets.
ITW Construction Product Segment accounts for approximately 11% of total sales. The Construction Product Segment offers a broad portfolio of branded fastening solutions and related products, including anchors, bolts, screws, adhesives, rivets, powder-actuated tools and accessories. These products are designed to provide customers with reliable performance even in challenging conditions.
Growth Prospects
Illinois Tool Works’ focus on core competencies and investing in industrial automation solutions have positioned them for continued success. The company has seen organic growth across several segments over the past few years. In addition to organic growth, Illinois Tool Works’ acquisition strategy has enabled it to expand globally and gain access to new technologies and markets. This diversification strategy has exposed Illinois Tool Works to many growing markets such as aerospace & defence, automotive aftermarket, oil & gas, and other industrial product categories.
Dividend Profile
Illinois Tool Works has an impressive dividend track record, having increased its dividend for 58 consecutive years, making it one of the few Dividend King companies that have increased its dividend for at least 50 consecutive years. It has a current dividend yield of 2.34%, and a payout ratio of 55.6%. Since 2013 ITW’s dividend per share has been increasing at a CAGR of 12%.
Business Risk
As with any business, ITW faces certain risks that can disrupt its operations and adversely affect its profits. These risks can be categorised into two broad categories: financial, operational
Operational risk: Despite its success, Illinois Tool Works regularly faces operational risks due to its extensive portfolio of subsidiaries. As a conglomerate organisation with multiple businesses, Illinois Tool Works may struggle with the complexity of managing operations across its many divisions. The risk associated with managing such a vast number of entities can be difficult for any business leader to overcome.
Financial risks: With operations in multiple countries worldwide, any fluctuation in currency exchange rates could significantly impact ITW’s bottom line if not managed properly. Furthermore, due to its diversified product portfolio and global supply chain, any changes in economic climate could significantly affect ITW’s profitability. Illinois Tool Works has implemented multiple safeguards, including strong internal controls and compliance practices, to mitigate these risks and ensure stability within its operations.
Closing Thoughts
Illinois Tool Works is looking to be an outstanding dividend stock for income investors. It has strong fundamentals, a generous dividend yield, and a long history of dividend increases. The company also has a diversified portfolio of businesses that should provide stability during economic downturns. In addition, its valuation appears reasonable, given its prospects. For these reasons, Illinois Tool Works is an attractive option for dividend investors looking to add exposure to the industrial sector.