Dividend Kings, or companies that have raised their payouts for at least 50 consecutive years, provide a great starting point for investors looking for reliable passive income sources. But some Dividend Kings don’t consistently raise their dividends by a meaningful amount, or they have fractures in their business model that could jeopardize future raises.
With 61 consecutive years of boosting its quarterly payout and a dividend that has more than tripled in the last 10 years, Illinois Tool Works (ITW -0.47%) — commonly known as ITW — has evolved into a passive income powerhouse. Earlier this month, ITW reported full-year 2024 results and provided guidance for 2025.
Here are some challenges affecting the business, what investors can expect from ITW over the long term, and why ITW is an excellent dividend stock to buy now.
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A flexible conglomerate
ITW is an industrial conglomerate with dozens of brands organized under seven segments — automotive original equipment manufacturing, construction products, food equipment, polymers and fluids, specialty products, test and measurement and electronics, and welding.
Unlike other conglomerates, ITW operates a flexible business model that lets customer needs drive new product development. The company’s customer-back innovation (CBI) strategy allows ITW to deliver solutions based on what customers are looking for, such as automotive components for both internal combustion engine cars and electric vehicles, lower emissions products, and more. For example, ITW cites CBI investments as a key reason why margins have soared in welding, which is now its highest-margin segment.
ITW invested about $800 million in 2024 to support long-term growth across its core business units and plans to accelerate CBI investments in the coming years. ITW increased its patent filings by 18% in 2024 — part of its innovation effort to address customer challenges.
Driving profitability
Over the last 15 years, ITW has more than doubled its operating margins by fostering a culture of operational efficiency that focuses on profitability rather than sales.
ITW Revenue (TTM) data by YCharts.
In 2024, six of the company’s seven segments grew margins, helping ITW achieve record operating margins of 26.8%. It expects enterprise initiatives to contribute another 100-basis-point increase in operating margins for 2025.
ITW’s pace of margin expansion puts it on track to achieve its 2030 goal of 30% operating margins. Other 2030 goals include 4% annual organic growth, a 7% increase to the annual dividend, 9% to 10% average annual earnings-per-share (EPS) growth, and 100% free cash flow (FCF) conversion, meaning FCF equals net income.
For context, ITW raised its dividend by 7% last year. It also converted 100% of net income to FCF. Generating high FCF allows ITW to repurchase stock consistently and pay dividends with cash. In 2024, it returned $3.2 billion to shareholders — about $1.7 billion in dividends and $1.5 billion in stock buybacks. It expects a similar capital return program in 2025,which would be fully supported by FCF.
Built to endure market cycles
Despite the strong margins and capital return program, ITW expects organic growth of just 0% to 2% in 2025 and generally accepted accounting principles (GAAP) EPS of $10.15 to $10.55 — which includes a $0.30 per share foreign currency transaction headwind. Excluding certain items, ITW’s 2024 EPS was $10.15, so the company is penciling in very little short-term growth. At a share price of $258.11 at the time of this writing, ITW has a 24.9 price-to-earnings ratio based on the midpoint of 2025 guidance. That’s somewhat pricey, even for a quality Dividend King.
On the earnings call, management discussed the broader industry slowdown, including how the downturn has already lasted about six to eight quarters — which it views as the typical length of a cyclical slowdown. However, ITW isn’t going to assume a recovery is coming. Instead, it is positioning the business to react quickly in case there is a demand rebound or the need to raise prices because of tariffs. ITW CEO Christopher O’Herlihy said the following on the recent earnings call in regards to cycles and pricing:
What I can assure you is that given the decentralized nature of the company, given the fact that decisions are made very close to our customers, then our nimbleness means that we are quicker to read and react more than more. So, there’s not a huge lag with us for that reason. There’s not a whole lot of approvals that are needed to implement pricing. It’s done on the ground, in the division, close to the customer relative to the circumstantial opportunity profile that the division sees.
ITW’s structure is a key reason why the business can navigate cycles so well. ITW has 84 divisions across seven segments, with each segment comprising 11% and 17% of 2024 operating income. This means ITW isn’t overly exposed to one segment, which can allow it to absorb an outsized downturn in a given market.
ITW deserves its premium valuation
ITW isn’t a dirt cheap stock. Its dividend yield of 2.3% is good, but not as attractive as higher-yielding Dividend Kings like Coca-Cola or PepsiCo. However, ITW is an incredibly stable business that delivers on its promises to investors — growing operating margins and a capital return program backed by free cash flow.
As we’ve seen over the last couple of years, ITW can still afford to pay a growing dividend and repurchase stock with cash even during slowdowns in core markets. In this vein, 2023 and 2024 acted as a stress test for the company. Based on management commentary on the earnings call, ITW is prepared in case of a prolonged slowdown or an escalation of tariffs. However, it is also nimble enough to capture upside potential if a recovery happens sooner than expected.
All told, ITW is worth buying for investors who don’t mind paying a premium price for a high-quality business.
Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool recommends Illinois Tool Works. The Motley Fool has a disclosure policy.