Honeywell Reaches Historial Peak: Is Dividend Giant from Dow standings Set to Release Additional Worth through Split-Up?
Honeywell International's (HON 3.48%) shares reached an all-time high on Tuesday, following news that Elliott Investment Management had amassed a more than $5 billion stake in the industrial conglomerate, making them the company's largest activist investor, holding between 3% and 4% of the stock.
Let's discuss why dividing Honeywell could be beneficial, a successful recent example of a breakup, and whether Honeywell is a worthy dividend stock investment now.
Losing popularity
Honeywell replaced defense contractor Raytheon Technologies in the Dow Jones Industrial Average in August 2020, providing the Dow with exposure to various industrial sectors. Defence is only one sector of Honeywell's business.
The company produces a vast array of products, from household fans and thermostats to personal protective equipment, automation systems for distribution centers, actuation systems for aerospace applications, control panels, and more. In addition, under the Honeywell Forge umbrella, it offers software that businesses in various industries can use to boost their operational efficiency.
Honeywell is divided into four segments: aerospace technologies, industrial automation, building automation, and energy and sustainability solutions.
Despite its diversification and dominance in several business-to-business categories, Honeywell has struggled to significantly increase its earnings in recent years. It transformed from a top-performing stock in the market to a laggard. Despite its post-earnings growth and the added boost from Elliott's news, Honeywell's stock has only risen by 28% over the last five years, while the S&P 500 has increased by about 90%.
To offset its past underperformance, Honeywell has gone on a buying spree, spending over $9 billion in 2024, focusing on attractive opportunities and shedding or reducing areas that aren't contributing to growth. Although this strategy has potential, it hasn't delivered impressive results yet. Honeywell anticipates organic growth of just 3% to 4% in 2024.
Elliott Investment Management's 23-page letter to Honeywell suggests a simple thesis: "Honeywell's conglomerate structure, which once worked, no longer does, and it's time to embrace simplification."
Elliott proposes splitting Honeywell into two companies: Honeywell Aerospace and Honeywell Automation. According to them, this could boost Honeywell's total share price by 51% to 75% over the next two years. Honeywell Aerospace would focus solely on aerospace and defense, contributing almost half of Honeywell's profits today. The aerospace and defense industries have seen record values for top players like RTX and Lockheed Martin. Elliott argues that spinning off Honeywell Aerospace as a separate entity will help bridge the valuation gap between it and its competitors.
Honeywell Automation would combine Honeywell's remaining business segments into one entity. Elliott attributes Honeywell's disappointing results in recent years to the conglomerate model, not the company's products.
Emulating GE's strategy
Perhaps the most crucial statement from Elliott's letter was this: "The advantages of a separation can be classified into two main categories: A) an enhanced strategic focus that will allow each company to achieve improved operational performance, and B) simplified investment narratives that will result in superior valuations."
Narratives are essential in investing. They can transform a company's description into a compelling argument for investing in its stock. For instance, the narrative behind Nvidia isn't just that it designs chips – it's that its chips are driving an entire technological revolution through artificial intelligence. Apple became a successful company because it integrated complex software and hardware into user-friendly consumer products.
Honeywell lacks a unified narrative since it does so much. General Electric (GE) faced a similar issue not long ago. Then, it divided into three entities: GE Aerospace, GE Healthcare, and GE Vernova. Each of these companies has a clear, focused narrative, helping to bolster investor loyalty and motivation.
GE Aerospace focuses on commercial, military, business, and general aviation aircraft, establishing itself as a technology and industrial player in the aviation market. GE Healthcare creates products and services for healthcare, from imaging and ultrasound equipment to digital solutions for data management, visualization, and more – positioning itself as an industrial and technological player in healthcare.
GE Vernova produces gas and steam turbines, generators, heat exchangers, wind turbines, hydrogen, carbon capture solutions, and more. It markets itself as a provider of solutions for the entire energy transition, rather than just oil and gas or renewables. GE Vernova's spin-off on April 2 has seen a remarkable 154% increase – making it one of the top-performing stocks in the S&P 500 this year.
GE Aerospace is the largest of the three ex-GE businesses by market capitalization, at around $198 billion, having grown by 238% over the past two years. GE Vernova now has a market value of over $91 billion, while GE Healthcare holds a $39 billion market cap. All told, the post-breakup company is now valued at approximately $328 billion – a stark contrast to GE's $41 billion market cap at the end of 2018.
A Path Worth Exploring
For quite some time, Honeywell has appeared to be a strong contender in the business world based on its financials. However, it has consistently fallen short of investor expectations. Recognizing the need for transformation, the company has been actively engaged in acquiring other businesses. Nonetheless, a split might be the key to unlock Honeywell's potential, allowing it to seize opportunities in fields it has been championing for years, such as the Industrial Internet of Things, automation, and the shift towards clean energy.
Currently trading at a price-to-earnings ratio of approximately 27 and offering a dividend yield of 1.9% at its current share price, Honeywell presents a reasonable investment value with an acceptable yield. Nevertheless, management has given no hints about contemplating a company split, leaving the idea as mere conjecture for now.
Nevertheless, the involvement of a notable activist investor who has purchased a significant stake in the conglomerate and believes in its potential for substantial growth suggests that Honeywell might be hiding untapped value.
Investing in Honeywell as a dividend stock could be an opportunity, given its current price-to-earnings ratio of around 27 and a dividend yield of 1.9%.
Elliott Investment Management's proposal to split Honeywell into two companies, Honeywell Aerospace and Honeywell Automation, could potentially boost the company's total share price by 51% to 75% over the next two years, as suggested in their 23-page letter to Honeywell.
