Honeywell: A Safe Haven

12/08/2015 7:00 am EST


David Fish

Executive Editor, Moneypaper

Just two years ago, we wrote that the noise coming out of Wall Street focused on whether the new highs represented a peak, suggesting that a new bear market might ensue, recalls David Fish, editor of MoneyPaper.

Now the noise focuses on how the major indexes have had difficulty sustaining each rebound.

To market technicians, that difficulty suggests that a new bear market might ensue, since there seem to be 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 as if we are doomed whether stocks are too strong or too weak. Add in weak commodity prices and the usual plethora of geopolitical unrest and you have the perfect cocktail of doom and gloom.

If history is any guide, investors would be better served by focusing 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.

Meanwhile, our latest featured dividend reinvestment idea is Honeywell (HON). Founded in 1920, this is a global diversified technology and manufacturing company with about $40 billion in annual sales.

It operates in aerospace, automation (sensing and security systems), transportation (turbochargers, thermal systems, and automotive products), and specialty materials.

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.

The dividend has been increased in ten of the last 11 years and the most recent increase of 15%—to $2.38 per share annually—provides investors with 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 cap of $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.

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.

There are 770 million shares outstanding, which is down from 862 million in 2003. Ongoing share repurchases should also enhance per-share results, but can be slowed if necessary, making the company a safe haven during difficult economic conditions.

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