Illinois Tool Works (NYSE:ITW): A Reliable Dividend Stock with Strong Profitability and Financial Health

Dividend investors frequently look for stocks that provide a steady income stream while keeping strong financial performance and profitability. One way to find these stocks is by using a dividend screener that selects for high dividend ratings, good profitability, and solid financial health. This method helps investors steer clear of high-yield traps, companies with unsustainable payouts, and instead focus on firms with steady dividend growth and reasonable payout ratios.

Illinois Tool Works (NYSE:ITW) appears as a stock worth considering under this approach. The company, a diversified industrial products manufacturer, performs well across important dividend measures while also showing strong profitability and acceptable financial stability.

Dividend Strength: Reliability and Growth

ITW’s dividend profile is notable for several reasons:

• Sustainable Yield: The company provides a 2.51% dividend yield, slightly higher than the industry average of 1.91% and close to the S&P 500’s 2.39%. While not the highest yield, it strikes a balance between income and sustainability.
• Steady Growth: ITW has raised its dividend at an average yearly rate of 6.98% over the last five years, showing a dedication to rewarding shareholders.
• Long History: With at least 10 years of continuous dividend payments and no reductions, ITW proves its reliability—an important quality for income-focused investors.
• Payout Ratio: At 51.65%, the payout ratio is somewhat high but stays within a reasonable range, backed by stable earnings growth.

These factors match the main ideas of dividend investing, where consistency and growth are often more valuable than high but uncertain yields.

Profitability: Strong Margins and Returns

A high dividend rating isn’t sufficient on its own—profitability ensures the company can maintain and increase its payouts. ITW performs well here:

• High Margins: The company has a 21.31% profit margin and 25.98% operating margin, beating nearly 97% of its competitors in the machinery sector.
• Strong Returns: ITW’s Return on Invested Capital (ROIC) of 23.99% and Return on Equity (ROE) of 104.83% show efficient capital use, supporting its ability to fund dividends.

These numbers explain why ITW’s ChartMill Profitability Rating is 9/10, marking it as a leader in its industry.

Financial Health: Balanced but with Some Debt

While ITW’s ChartMill Health Rating of 6/10 points to minor issues, the company remains financially stable:

• Solvency: An Altman-Z score of 8.09 (far above the safe level) and a reasonable Debt-to-FCF ratio of 3.28 suggest low bankruptcy risk.
• Debt: A Debt-to-Equity ratio of 2.78 is higher than peers, but this is partly balanced by strong cash flow.

For dividend investors, the main point is that ITW’s debt doesn’t pose an immediate risk to its payout, though it should be watched.

Valuation and Growth Factors

ITW trades at a P/E of 25.31, slightly below the S&P 500 average but above its industry peers. While not inexpensive, the higher price is justified by its profitability and dividend consistency. Future EPS growth of 9.88% (based on analyst estimates) indicates potential for further dividend increases.

Final Thoughts

ITW meets the dividend investor’s criteria: a dependable payout history, sustainable yield, strong profitability, and sufficient financial health. While its valuation isn’t low, the mix of income and quality makes it an attractive option for a diversified dividend portfolio.

For more high-quality dividend stock ideas, check out the full Best Dividend Stocks screen, which selects top-rated dividend payers with solid fundamentals.

Disclaimer: This article is not investment advice. Always conduct your own research or consult a financial advisor before making investment decisions.