Time for Another Performance Check
For some background on the idea behind the Performance Check, and the XIRR function used for the calculations, please see my first post in this series.
The series continues with a look at another dividend-paying stock from my Portfolio (this becomes the 16th overall). My last Performance Check was a couple of months ago, when I examined my performance for Skyworks Solutions (SWKS), which provided an outstanding compound annual growth rate of 16.51%. It may prove to be a tall order to beat that number.
In this post, I’ll be checking my performance for Illinois Tool Works (ITW). ITW is in the Industrials sector, and the machinery industry.
ITW is over 100 years old, having been founded in 1912, a couple of years after a Chicago financier placed an ad seeking to provide capital to a manufacturing entity in or near Chicago.
ITW is a global diversified manufacturer. The company manufactures and sells industrial products and equipment, operating through seven segments which are each substantial in percentage:
- Automotive OEM (22%)
- Food Equipment (15%)
- Test & Measurement and Electronics (15%)
- Welding (12%)
- Polymers & Fluids (12%)
- Construction Products (11%)
- Specialty Products (13%)
Today, the company has operations in 55 countries, employs more than 45,000 people, and is headquartered in Glenview, Illinois. Many of the employees have specialized engineering or scientific experience.
ITW has been an solid contributor to my Portfolio since my initial purchase back in 2015. Not only have I seen good price appreciation, but outstanding dividend growth, too. This is always a welcome combination in my Portfolio. In terms of value, ITW currently holds down the #14 spot in my Portfolio.
Before jumping into my performance since owning ITW, let’s first check out the historical dividend growth for the stock…
What’s not to like here, right? You can see ITW’s dividend growth over the 4 reporting periods I show has been outstanding. The lowest growth rate being 12.62% for the past 10-yr period. Growth over the near-term has been even stronger.
There was a slow down to single-digit growth in the years following the Great Recession, but it’s generally been strong, even during the worst of times The most recent raise was 6.54% this past August (in the throes of the pandemic), which appears to be comparable to the company’s dividend growth in other uncertain times.
ITW is riding a streak of 46 consecutive years of dividend increases, putting the stock within striking distance of Dividend King status.
The current payout ratio for the stock is ~77% based on this year’s earnings estimate of $5.91, but ~63% based on next year’s earnings estimate of $7.19. In either case, both payout ratios are on the high side, so perhaps expect ITW to have slower dividend growth in the coming years.
My Personal Performance for ITW
Below is a capture of the spreadsheet I keep with my ITW cash flows, and the calculated XIRR. Compared to my five legacy Portfolio holdings (PG, RPM, AFL, PEP & JNJ), the table for ITW is small, due to its shorter holding period and small number of transactions. With ITW being a relatively new Portfolio position (about 5 years), I don’t have a large amount of data/time to factor into the return calculated in this Performance Check. Therefore, as I move forward in the near-term, large price changes can have a significant impact on my annualized return.
Here’s a note with regard to the possible ‘Type’ column entries: EOY Value = End Of Year Value, Dividend = a dividend that was not reinvested (a cash outflow), Options = income from writing options against the shares (another cash outflow).
The duplicate EOY Value entries at the end of each year (one negative, one positive) do not affect the cash flow, and can be thought of as boundary markers, allowing me to make the individual yearly return, and the annualized total return calculations.
I started my ITW position back in August of 2015 with 45 shares at a price south of $86. Since then, I’ve only made one other share addition, a 10 share purchase almost exactly 3 years later at a price of $136.40. Thus, it’s a fairly straightforward set of entries.
Yearly returns for ITW have been strong outside of the pullback in 2018.
Ever since initiating my position, I’ve been holding my shares and reinvesting my dividends. I’ve added over 6 shares through dividend reinvestment over the years, and my position currently stands at 61.528 shares.
The following price chart is also helpful to see. It shows the stock price change since my initial purchase on 8/21/2015.
Short of that price decline in 2018 that I mentioned, the price for ITW has been up and to the right for the most part. However, you can see the big drop at the start of 2020 that came with the arrival of the pandemic. Luckily, the stock quickly recovered and has since powered to new highs.
ITW is up strongly year-to-date for me, rising about 17.8% for the year (including dividends). This adds to what has usually been double-digit gains for the stock in most years.
The yield for ITW has been falling with recent price appreciation and currently stands at 2.21%. This is below its 10-yr. median yield of 2.29% over the past decade , and this is also below my average Portfolio yield of 2.54%. However, thanks to that awesome dividend growth of ITW’s, my yield on cost is 4.56%.
The stock currently has a value weighting in my Portfolio of 2.76% – my 14th largest position (as noted earlier) out of 48 stocks. The dividend weighting is slightly lower, sitting at 2.40%.
All ITW dividend payments I’ve received since my position was started have been reinvested.
My current investment in ITW is $5,224.95. My cost basis, which includes $930.19 in reinvested dividends, is $6,155.14.
Meanwhile, the current value is $12,714.15, which reflects a capital gain (on paper) of $6,559.01. The annualized total return ends up being 21.69%, covering my initial purchase on 8/21/2015, through 10/17/2020. I love seeing another Portfolio stock reach the 20% mark for annualized growth rate.
Summary
My performance for ITW has been solid throughout the entire time I’ve held the stock, with annualized returns always being in the double-digits, and more often than not being north of 20%.
The stock has nearly gone up in a straight line for me since my initial purchase, ignoring 2018 of course.
My 21.69% annualized return with ITW is nearly the best return in my Portfolio given the stocks I’ve reviewed thus far.
If ITW can continue its wonderful performance for me over the next year or two, I wouldn’t be surprised to have the stock crack my top 10 Portfolio stocks.
With terrific performance and tremendous dividend growth for me thus far, I foresee ITW remaining a core holding in my Portfolio.
Performance Check Comparisons
Bringing the returns for my other Performance Check stocks (PG, RPM, AFL, PEP, JNJ, AL, GILD, TROW, FAST, WPC, O, GNTX, QCOM, XOM & SWKS) up-to-date allows for the comparison below.
The rightmost column shows the year of my initial purchase for each stock, just to provide some detail with regard to how many years are part of the annualized return.
Also note, XOM was sold due to poor performance, so obviously annualized returns are no longer provided for the stock.
ITW managed to rank quite highly in its initial appearance in my Portfolio performance table. It shows up with the 2nd best annualized return for the Portfolio stocks I’ve reviewed thus far with that 21.69% annualized return.
It’s also 1 of only 4 stocks from the table still sporting a 20%+ annualized return, joining Qualcomm (QCOM), Realty Income (O) and Fastenal (FAST).
There’s been some decent return movement since my last Performance Check about two months ago. Six stocks improved on their annualized returns, while eight dropped a bit.
The biggest mover to the upside has been QCOM, adding a whopping 2.77% to it annualized return.
The biggest mover to the downside with regard to annualized returns was FAST, which relinquished 2.03%.
Overall, it’s hard not to like the performance of the group I’ve reviewed. Since eliminating XOM, it’s now only 3 of 15 stocks showing compound annual growth rates less than 9.1%. Furthermore, I now have 4 stocks showing annualized returns over 20%, too.
On deck for my next Performance Check is BlackRock (BLK). BLK has been up and down in price significantly over my holding period, but how has it fared over the entire time I’ve owned it? Find out next time!
Have you been holding a stock for a few years, but don’t have a good idea of the return the stock has provided for you? It could be time for a Performance Check! I look forward to your comments, as well as any return numbers for any Performance Checks you’ve calculated.