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Pilot in a cockpit


Industrial Firm With 9 Years of Dividend Growth Reaffirms Position on Best Dividend Stocks List

Aaron Levitt Mar 04, 2020

The market is in turmoil. The coronavirus continues to wreak havoc as the outbreak spreads globally. This has sent many traders heading toward the exits as concerns about the global economy heat up. But not all stocks are suffering in the same vein. Those with high growth and top opportunity niches are doing better than most – and that includes our pick in the industrial sector.

While most of its peers have suffered significantly, thanks to the trade war and now the coronavirus outbreak, our pick has continued to plow forward. That’s because our pick’s new focus on aerospace engineering is the hottest market niche around.

Once a diversified manufacturer, our pick has continued to use M&A and strategic buyouts to boost its presence in the aerospace markets – both commercial and military. And thanks to upcoming spin-offs of its remaining non-aerospace businesses, our pick is ready to become a lean, mean growth machine – one solely focused on a single primary market segment.

See our original write-up here.

Even better is that our pick is taking a page right out of the tech sector’s playbooks. A hefty dose of software, the industrial internet of things (IIoT) and subscription revenues dot its bottom line. This has only made our pick’s earnings and cash flows surge over the last few years. It’s also made our pick a wonderful dividend-growth stock as well. The firm managed to increase its payout by nearly 10% at the end of last year. Meanwhile, its buyback program has been expanded.

Given the high-tech nature of its niche plus its large moat, our pick has the goods to navigate the latest setback due to the coronavirus. In the end, our industrial best dividend stock could be one of best investments of the upcoming quarters.

To summarize, here are five reasons why you should own this stock.

1. Global diversified manufacturer covering a wide range of high- and low-tech products across various sectors.
2. Pulled in more than $35 billion in revenues during 2019 and managed to see a 8% CAGR for its EPS over the last five years.
3. Smartly used spin-outs to improve results and boost profits further.
4. Realized nearly $6 billion in adjusted free cash flows for all of 2019.
5. Healthy payout ratio of 40% and yield of 2.19%.

Our Best Dividend Stocks List has 20 of the highest-rated stocks by our proprietary rating system. Go Premium to find out the entire list.

Honeywell Keeps the Wins Coming

First the trade war managed to knock the industrial sector down a few pegs as questions about China’s ability to navigate the tariffs came into play. Now the coronavirus has sent fears about the world’s supply chain into traders’ minds. This has continued to pressure stocks in a major way. But you wouldn’t know it by looking at Honeywell (HON ). The firm’s results continue to be impressive, and even better is that the industrial name has held up through the recent volatility.

Much of that is due to HON’s continued shift towards aerospace engineering. While many of the other portions of its business are flatlining, aerospace is starting to rise. As governments look to strengthen their defense capabilities and commercial airlines look to reduce costs, decrease downtime and make their operations more efficient, Honeywell has seen its star rise further. Sales rose 7% during the fourth quarter alone from the segment.

Meanwhile, margins also continue to rise – clicking in at nearly 27% for the segment. Those high margins come from HON’s high-tech nature and moves into the connected aerospace segment/software. Recurring revenues and subscriptions are quickly driving the show. Even better is that HON’s pending spin-offs of several slower divisions could help drive growth further.

Already a cash cow, all of this could make Honeywell an even bigger dividend machine for shareholders. With that in mind, let’s dig into the numbers and see if HON makes a great buy in the current market.


DARS – Relative Strength

At the time of writing, the coronavirus had started to seriously impact the markets. Last week alone, stocks had their worst one-week performance since the Great Depression. Industrials have been hit particularly hard as questions about growth, the world’s supply chain and demand have come to the forefront. And that includes Honeywell.

Currently, HON stock is trading about 10% below its 52-week high.

However, while that dip is concerning, in context, it’s actually pretty great. Broadly speaking, many industrial names have dropped by much more. Secondly, that dip is actually less than market measures like the S&P 500. Investors, for the most part, are keeping HON in their portfolios.

And that’s just what our DARS model is looking for. In falling markets, our model looks for stocks that investors aren’t casting away. This shows forward momentum in shares versus their rivals. Honeywell continues to be a market leader and thrive in its aerospace niche.

As a result, the less-than-average dip and forward momentum allows Honeywell to score an optimal 5-out-of-5 for our model’s Relative Strength metric.

DARS – Yield Attractiveness

The coronavirus-induced dip has made many stocks high yielders in recent weeks. And that’s the case with Honeywell. Today, HON stock can currently be had for a yield of around 2.19%.

This is a bit higher than our initial selection of the stock during the fall; however, the higher yield is a function of two things. First, the recent 10% dip in shares has pushed up the yield. Secondly, Honeywell recently increased its payout by 9.76%. The combination provides a better-than-market-average yield for the stock.

And that’s just perfect for DARS.

Our DARS model tends to hone in stocks with yields within the 1 to 3.29% range. This range tends to provide the best overall total returns. That is, a combination of dividends as well as capital gains. This is what’s been going on at HON. Shares have provided some capital gains – or at least has limited losses versus its rivals. Meanwhile, the yield is still high enough to make a difference in terms of returns. This is a prime example of our Yield Attractiveness metric in action.

With Honeywell paying $3.60 annually, shares once again score a perfect 5-out-of-5 for the metric.

DARS – Earnings Growth

Aerospace is simply a high-tech market segment. High-engineered parts are expensive, while the new connected aerospace market features very high revenues. Luckily for Honeywell, it’s mastered both of these prongs of the industry, which has made it an earnings and revenues machine. In fact, just last year, Honeywell again managed to see record sales.

And analysts are predicting another banner year for the firm. Right now, analysts are expecting the firm to earn $9.51 per share in 2021. That’s a 7.85% increase over what it is estimated to earn this year. Much of that continues to come from improvements to its margins and focus on high-tech aerospace segments.

The best part is that those estimates may be a bit conservative. Two factors hindering those numbers continue to be the issues with Boeing’s (BA ) 737 Max plane and the coronavirus. If those two issues resolve themselves sooner than later, HON’s earnings could jump further.

Either way, HON’s already impressive pace of EPS growth is exciting for our DARS model. The model focuses on stocks with steady medium-to-high single-digit increases. With Honeywell’s estimated earnings fitting within that range, the stock once again scores a perfect 5-out-of-5 for Earnings Growth.

What exactly is a DARS rating? Find out here.

DARS – Dividend Uptrend

One of Honeywell’s issues has long been its valuation. As a premium player in a premium niche, the stock has historically been expensive relative to its peers. However, the recent downturn may have provided investors with a gift.

Today, shares of HON can be had for a forward P/E of just 18.

This is below the stock’s historic norm and lower than our initial selection of the stock a few months ago. Meanwhile, HON is now in line with the broader S&P 500 when it comes to forward valuations. That makes it a huge bargain given its place among premium industrial names.

Our DARS model senses the big discount in HON shares. The stock fits within the ideal framework for growth at a reasonable price: It’s not too high or too low, and there is plenty of room for a good total return. And, now, that margin of safety is even larger.

With Honeywell trading for “peanuts” compared to historic valuations, the stock scores high for our Dividend Uptrend metric.

DARS – Dividend Reliability

Honeywell continues to be a great dividend stock. Thanks to rising cash flows, high margins and better profits, the firm has managed to raise its payout steadily over the last eight years. This includes a 9.76% jump toward the end of last year. And you can see this in action with its payout ratio of 40%.

This payout ratio is lower than our recent update of the stock and underscores how the firm’s shift toward aerospace is working. Honeywell is making so much in profits that it’s able to raise its payout and improve its payout ratio. This means there’s even more cash for dividend raises ahead.

This is exactly what DARS and dividend investors should be looking for. HON’s dividend has the ability to grow and once again scores top marks for Dividend Reliability.

The Bottom Line

Despite the recent market downturn, Honeywell continues to hold up nicely. Thanks to its focus on aerospace, high margins and great profits, investors have continued to hold shares during the sell-off. This has allowed it to score perfectly in our DARS model and keep its spot on our Best Dividend Stocks List.

Keep track of the latest news in our News section, where we regularly publish the latest around dividend investing.

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