Why Honeywell Stock Is Particularly Attractive Now
Ignore the doom and gloom. Keep your eye on stock fundamentals.
It was only two years ago that David Fish, Moneypaper executive editor, observed that "(m)ost of the 'noise' coming out of Wall Street focuses on how high the major indexes have risen and whether the new highs represent a peak." His point? The market pundits were all suggesting that a new bear market might be just around the corner.
Now the “noise” focuses on how the major indexes have fallen this year and the difficulty they have in sustaining each rebound. In other words, a new bear market might be just around the corner, pundits say. The argument is that there are fewer companies with strong earnings growth, which would lead to a collapse in investor confidence just as the Fed begins to raise interest rates.
So it seems that doom lies just around the corner whether stocks are too strong or too weak. Add in weak commodity prices and the plethora of geopolitical unrest, and you have the perfect cocktail of doom and gloom.
But let’s step back. If history is any guide, it should be clear that the worries of two years ago ignored the fact that market peaks are generally preceded by a series of new highs, sometimes stretching out over several years.
This year, the volatility and uncertainty ignores the fact that, in the short term, markets are driven as much by emotion as by logic, but strong business operations lead to higher stock prices over the long term.
Our belief now, as it was two years ago, is that investors should focus on the fundamental values of the particular stocks that they own. Strong businesses continue to deliver rising profits (and dividends) year after year, despite the hand-wringing and confusion of traders and pundits, who are in the business of making noise. Don't forget the importance of the “Off” button.
Twice each month, we focus attention on a DRIP stock that appears likely to reward the long-term investor. Our current special is Honeywell International (HON).
Founded in 1920, Honeywell is a global diversified technology and manufacturing company with about $40 billion in annual sales. It operates in four segments: Aerospace (turbine propulsion engines, auxiliary power units, environmental control systems) provides over 30% of sales; Automation and Control Solutions (sensing and security systems for buildings, homes, and industry) over 40%; Transportation (turbochargers, thermal systems, electronic components, and other automotive products) about 10%; and Specialty Materials (resins, chemicals, fibers, films, adhesives) the remainder.
According to Yahoo! Finance, the consensus estimates of 22 analysts call for Honeywell to earn about $6.10 per share this year and $6.56 in 2016, compared with $5.56 in 2014. There are 770.7 million shares outstanding, which is down from 862.3 million in 2003. The dividend has been increased in 10 of the last 11 years, and the most recent increase of 15%, to $2.38 per share annually, provides a 2.3% yield.
What makes Honeywell attractive now is its size and available resources, along with those expectations of higher earnings in the next couple of years. HON has a market capitalization of about $78 billion and an A credit rating, according to Morningstar, which also accords it a wide moat that should deter competitors, a valuable trait during tough economic times, if they should arise. Notably, the newly raised dividend results in a payout ratio of just 39% of earnings, leaving Honeywell with plenty left over for capital expenditures, even in the event of a decline in sales and earnings. Ongoing share repurchases should also enhance per-share results, but can be slowed or suspended if necessary, making the company a "safe haven" during difficult economic conditions.
Honeywell is just one of the high-quality companies that offer investing through a dividend reinvestment plan (DRIP). Honeywell does not charge fees for cash investments or dividend reinvestments through its DRIP. Click here for a list of other no-fee DRIPs.
Ms. Vita Nelson is one of the earliest proponents of dividend reinvestment plans (DRIPs) and a knowledgeable authority on the operations of these plans. She provides financial information centered around DRIP investing at www.drp.com and www.directinvesting.com. She is the Editor and Publisher of Moneypaper's Guide to Direct Investment Plans, Chairman of the Board of Temper of the Times Investor Service, Inc. (a DRIP enrollment service), and co-manager of the MP 63 Fund (DRIPX).
About the Author
Founding Publisher and Editor, Moneypaper