Published on April 10th, 2018 by Nate Parsh
Honeywell International (HON) produces avionics equipment, small jet engines, industrial materials, climate control systems and automotive products. It has also increased its dividend for nearly a decade. Honeywell will join the list of Dividend Achievers with just a few more dividend increases. You can see the entire list of all 266 Dividend Achievers here.
This article will discuss Honeywell’s most recent earnings report, guidance for 2018, dividend history, recession performance and current valuation to determine if now is the right time to buy shares of the company.
Earnings Overview
Honeywell reported fourth quarter and full year 2018 earnings on 1/26/2018. Adjusting for a charge due to tax reform, the company earned $1.85 per share during the quarter. This was $0.01 above analysts’ estimates and 8% above the year-ago period. Revenue grew 8.6% to $10.84 billion. This was $90 million above expectations.
Breaking results down further, the Aerospace division saw 5% organic sales growth due in large part to the increased number of commercial plane delivered. Aerospace is the largest component of Honeywell and accounted for 36% of quarterly revenues. Aftermarket services were also in high demand during the quarter. This is important because approximately two-thirds of revenues from the Aerospace division are related to aftermarket services.
The company’s Home and Building Technologies segment, which provides security, fire safety and heating and cooling sensors, grew sales 3% in the fourth quarter. Sales for fire systems were strong in the U.S. and around the world. Aerospace strength was especially strong in China, where sales grew high single digits. Home and Building Technologies represented almost a 24% of sales in the fourth quarter.
Performance Materials and Technologies, which produced about a quarter of sales, saw growth in all of its businesses. The company continues to point out that its home insulation product Solstice is performing quite well around the world. This innovative insulation product allows customers to keep their home heating and cooling costs down.
Safety and Productivity Solutions division is the smallest part of the company and contributed 13.6% of revenues for the quarter. Sales were up a robust 12% organically, as orders and backlog were up sharply year over year. Sales were up double-digits for the company’s Intelligrated and Retail products.
The fourth quarter results were a nice way to end a very strong 2017 for the company.
Source: Honeywell’s Fourth Quarter Earnings Presentation
For the year, Honeywell saw 4% organic sales growth while earnings grew 10% from 2016. The company’s $7.11 in earnings-per-share was above even the company’s own guidance from earlier in the year.
Honeywell also produced $4.9 billion in free cash flow. The company gave shareholders their eighth double-digit dividend increase in the last ten years, which we will talk more about below. Honeywell also repurchased $2.9 billion worth of its own shares during 2017. The dividend increase and share buyback show that Honeywell is a very shareholder friendly company.
The company also discussed its guidance for the current year on the conference call. Thanks to expected continued growth across the company as well as tax reform, Honeywell sees another year of growth in 2018.
Source: Honeywell’s Fourth Quarter Earnings Presentation
Honeywell expects to earn $7.75-$8.00 a share, up from $7.55-$7.80. This would be an increase of 9%-13% for earnings from 2017’s total. Margins are expected to improve company-wide. The company expects its tax rate to be in the range of 22%-23%, down from its historical rate of 25%-26%. As you can see from the chart above, Honeywell expects all divisions to grow both total and organic sales numbers. At the end of February, Management reiterated their guidance and said that they are on track to meet their targets at the company’s Annual Investor Conference.
The company said on the conference call that their planned spinoff of its turbocharger and home heating, ventilation and air conditioning businesses should be completed by the end of the year.
Just as important to me as this sales and earnings guidance is that Honeywell is forecasting strong growth for free cash flow in 2018. Free cash flow is vital to company’s ability to grow its dividend to shareholders.
Dividend History
Honeywell’s dividend growth streak of seven years might not be as impressive as some other companies, but the dividend has been steadily growing over the past few years.
Though the dividend has grown every year since 2011, the company maintained the same dividend between 2001 and 2004 and more recently in 2009 and 2010. Honeywell has raised the dividend aggressively in recent years. The most recent raise was announced on 9/29/2018, which increased the dividend 12%. This double digit increase is in line with the company’s recent history of dividend growth.
The reason Honeywell has been able to achieve double digit dividend growth over the past decade is that the company’s free cash flow continues to increase.
While there was a dip from 2011-2012, free cash flow has really accelerated in recent years. In fact, the $4.9 billion in free cash flow that Honeywell produced in 2017 is more than double 2012’s figure. In its guidance for 2018, Honeywell’s management said that they expect to see free cash flow of $5.2 to $5.9 billion. This would be a 5%-20% improvement from 2017’s totals. This sort of free cash flow improvement is why management can continue to give such generous dividend raises.
As free cash flow has improved, the company’s payout ratio has declined as well. Even after a decade of double digit increases, Honeywell still has a very low payout ratio of about 43%. This is an impressive feat that can only be attained if the company is generating a lot of cash flow.
Honeywell expects the dividend to grow in line with earnings in 2018 and beyond. Remember, management guided towards 9%-13% earnings growth for the year, so investors can reasonably expect that the next dividend raise will be in this range.
Recession Performance & Valuation
Like most companies during the Great Recession, Honeywell’s earnings per share declined dramatically. Earnings-per-share during the Great Recession are below:
- 2007 earnings-per-share of $3.16
- 2008 earnings-per-share of $3.76 (19% increase)
- 2009 earnings-per-share of $2.85 (24% decline)
- 2010 earnings-per-share of $3.00 (5.3% increase)
Honeywell performed well in 2008, but 2009 was a very difficult year. The company saw a slight earnings improvement in 2010, but it wasn’t until 2011 that Honeywell returned to its pre-recession earnings per share numbers. After 2010, Honeywell saw significant earnings improvement.
While the stock isn’t recession proof, this does show that Honeywell has a strong business that should do very well in a bull market. And that is just what shares have done.
Shares of Honeywell have seen their share price dip in 2018, but the stock is still beating the S&P 500 over the past year. In fact, shares of Honeywell have beaten the index for much of that time. After losing 5.77% year to date, is Honeywell trading at an attractive valuation?
Based on the 4/9/2018 closing price of $142.83, Honeywell shares trade with a price to earnings multiple of 17.8 using ValueLine estimates for 2018 earnings.
Source: ValueLine
The stock’s normal price-to-earnings ratio over the past 10 years is 15.3, meaning shares are trading above its long-term average. This indicates the stock is slightly overvalued at this time.
Final Thoughts
Honeywell produced strong earnings and sales numbers for both the fourth quarter and for 2017. The company also offered strong guidance that should see earnings per share grow by at least 9% in 2018. Honeywell has raised its dividend for the past seven years. The company has seen an impressive increase in cash flow that has allowed it to give shareholders an average of at least 10% dividend growth over the past ten years.
With that said, Honeywell’s earnings-per-share have increased dramatically since the Great Recession, but the company is not recession proof. Also of note is that management isn’t afraid to pause dividend growth, doing this several times since the Great Recession. Honeywell stock is not undervalued, but it remains a strong dividend growth company.
