How Fed’s Rate Hike Will Affect Honeywell’s Pension Objectives



Honeywell’s pension obligations

Honeywell (HON) offers defined benefit plans that cover the majority of its employees and retirees in the United States and many other countries. All non-union hourly and salaried employees joining Honeywell for the first time after December 31, 2012, aren’t eligible to participate in Honeywell’s US defined benefit pension plans.

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Comparing Honeywell’s unfunded PBO with peers

Since 2012, Honeywell’s projected benefit obligations (or PBO) have been in the range of $21.9 billion to $23.8 billion. At the end of 2015, HNO’s total PBO stood at $23.6 billion. HON’s PBO is underfunded by $1.2 billion, which signifies a funding status of 95%. General Electric’s (GE) PBO is underfunded by $33.3 billion, United Technologies’ (UTX) PBO is underfunded by $4.4 billion, and Textron’s (TXT) PBO is underfunded by $1.2 billion as of the end of 2015.

Honeywell’s funding policy for qualified defined benefit pension plans is to contribute amounts to meet regulatory funding standards. Since 2013, HON hasn’t contributed to the pension fund, as it is sufficiently funded.

Impact of interest rate hike on PBO

The Fed’s rate hike in December is expected to benefit HON’s pension plan because of the higher discount rate that will be applied for calculating PBO due to the rate increase. Interest rates directly influence the discount rate. According to HON’s estimates, a 0.25% increase in the discount rate would decrease its PBO by $470 million, resulting in the reduction in the underfunded percentage as well.

Investors can indirectly hold Honeywell by investing in the Industrial Select Sector SPDR Fund (XLI), which invests 4.6% of its portfolio in Honeywell as of January 9, 2017. In the next part, we’ll look at the latest analyst recommendations and their price targets for Honeywell.


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