Honeywell International Inc. (HON) has impressive dividend growth and maintains a ROE of over 13%, but the firm trades at a premium valuation.

Summary:

Honeywell’s (HON) dividend was increased by 12% with an overall yield above that of the S&P 500 Index at 2.42%. Honeywell is a leading industrial conglomerate firm with three separate business units; Automation, Aerospace, & Control Solutions. It ranks 75th in the Fortune 500 company list.  Honeywell has paid dividends consecutively for 23 years. It currently ranks 19th in yield within the large cap industrial dividend stocks. Last week, the firm posted Q3 earnings of $1.67 per share, 3 cents above already reduced expectations. The reduction in earnings guidance earlier this month was primarily due to poor results in both the oil & gas and jet divisions.  The only portion of Honeywell’s business to perform well for Q3 was their home and building division (+5%). During their October 21st conference call, management outlined expectations of $6.62 in earnings per share for the year. CEO Dave Cote indicated he expected Honeywell to return to double-digit EPS growth in the fourth quarter with a full-year EPS future growth target of between 8% and  9%. Mr. Cote also expects cost savings in the next twelve months of $175 million from the restructuring plan in place. Mr. Cote will be stepping down next year while COO Darius Adamczyk will succeed him.  Mr. Adamczyk will assume the new position next March while Mr. Cote will continue as executive chairman for an additional two years.

Honeywell International

Honeywell International

For the firm’s fourth quarter outlook, Honeywell is anticipating that sales will continue to decline (up to 20%) particularly in defense, space, and jets.  Despite the weaker performance results, the firm continues to increase dividends and actively repurchase shares of stock. Honeywell has already matched the total repurchases of stock in all of 2015.  The firm plans to repurchase nearly $2 billion in stock over the next twelve months.  Honeywell International also maintains a stellar return on equity of 26.84%. Net margins are also at a record high level, at 12.5%. This is double what net margins were in 2006.

Honeywell has maintained a three-year growth rate of dividends of over 13 percent. The company indicated in its conference call that they have doled out $2.4 billion of dividends alone in 2016 and moreover the firm is committed to enhancing the dividend faster than the rate of earnings growth each year.The quarterly dividend for the December payment will be $0.665 versus the prior year rate of $0.595 per share. HON does not qualify as a member of our Top 100 Dividend Stock List (see below).

The dividend will be paid at the new higher rate on December 9, 2016, to shareholders of record at close of business on November 18, 2016. Honeywell International Inc. is currently priced at $109.83. Listed in the table below are the quarterly dividend payments since 2010.

Honeywell

Analysis of Honeywell International Inc. is based upon our five key criteria, which include; 

Honeywell

Additional Information on P/S ratio and historical yield;

Honeywell

Final Analysis;

Positives;

  • Honeywell’s dividend yield is above that of the S&P 500 Index
  • Honeywell maintains an impressive 3 year dividend growth rate of 13.4%.
  • Honeywell has paid out a dividend consecutively for the past 23 years.
  • Honeywell maintains a credit rating of A. This is investment grade

Negatives;

  • Honeywell is trading at a modest forward PE ratio, but on a price/sales (P/S) basis it is trading at elevated historical levels. From a relative valuation perspective based upon P/S, Honeywell is overvalued. Its yield is also below the historical max yield of 2.71%. Net margins are also at a peak level and nearly double historical levels.
  • Honeywell maintains a beta of 1.05, higher than the average company.

Based upon its higher relative valuation (P/S), peak net margins, and above-average beta, Honeywell does not qualify as one of our Top 100 Dividend Stocks. Within the industrial sector, Honeywell’s ranking is 116.  Honeywell’s industrial industry competitors Mosiac (MOS), Cummins (CUM), Deere (DE), and Magna International (MGA) all rate higher (total score example) and are listed of my favorite Top 100 dividend companies.


Disclosure: I have no position in Honeywell.


About the Author Timothy J. McIntosh

Mr. McIntosh is the author of the three investment books including the newly released “The Snowball Effect, “The Sector Strategist”, and also “The Bear Market Survival Guide”. He also writes a daily dividend blog www.thedividendmanager.com

He currently serves as the Chief Investment Officer of SIPCO. He is the portfolio manager for the firm’s U.S. Value Leaders and U.S. Corporate Bond Portfolios. He also served as a Professor of Finance at Eckerd College from 1998 to 2008.He has been featured in such notable publications as the Wall Street Journal, New York Times, USA Today, Investment Advisor, Investment News, Fortune, and The Tampa Bay Times. He holds a Bachelor of Science Degree in Economics from Florida State University, a Master of Business Administration (M.B.A) from the University of Sarasota, and a Master of Public Health Degree (M.P.H) from the University of South Florida. He and his wife and two boys reside in Tampa, Florida.