Illinois Tool Works’ fourth-quarter dividend
In a press release on November 1, Illinois Tool Works (ITW) announced the key dates for its fourth-quarter dividend. Investors who hold Illinois Tool Works stock as of the close on December 31 in the company’s record will be eligible for the dividend. The dividend will be paid on outstanding common shares. At the end of the third quarter, Illinois Tool Works had ~335.3 million outstanding shares. Assuming that no share buyback takes place before the record date, Illinois Tool Works would pay $335.3 million in the form of dividends. The company is expected to pay the dividend on January 10, 2019.
On a sequential basis, Ilinois Tool Works maintained a dividend rate of $1.00 per share. On a year-over-year basis, the dividend represents an increase of 28%. Stanley Black & Decker (SWK), Caterpillar (CAT), and 3M (MMM) have a dividend growth of ~4.8%, 10.25%, and 15.7%, respectively. Illinois Tool Works has outpaced its peers regarding the dividend growth. In the past four years, the company’s dividend has grown at a compound annual growth rate of 18.4%. With such a high dividend growth rate, we need to see if Illinois Tool Works’ free cash flow can support the dividend growth.
Free cash flow
In the first three quarters of 2018, Illinois Tool Works has generated a free cash flow of $1.72 billion. From 2012 to 2017, the company’s average free cash flow stood at $1.87 billion. On average, Illinois Tool Works has used ~42% of its free cash flow to pay dividends, which leaves more than 50% of its free cash flow to be used for other activities like share buybacks and debt repayment. The company’s free cash flows support the strong dividend growth.
To hold Illinois Tool Works indirectly, investors could consider the Industrial Select Sector SPDR Fund (XLI), which holds ~2.0% in Illinois Tool Works as of December 20.