Should You Follow Activist Investors Into This Dividend Stock?

In today’s world, where technology, automation, and sustainability are redefining industries, Honeywell International Inc. (HON), a century-old powerhouse, thrives across aerospace, energy, and smart building solutions. The industrial conglomerate concurrently delivers steady dividends, appealing to investors seeking stability.

Recently, activist investment firm Elliott Investment Management, led by Jesse Cohn and Marc Steinberg, acquired a stake worth over $5 billion, becoming Honeywell’s largest active investor. Elliott has pushed for splitting Honeywell into two entities - Honeywell Aerospace and Honeywell Automation - arguing that this could unlock additional shareholder value and sharpen the company’s growth strategy.

Elliott’s track record of reshaping corporate trajectories through asset optimization and expense efficiency adds intrigue. Known for high-stakes activism, its involvement often signals seismic shifts.

So, with Honeywell’s future in the spotlight and Wall Street watching closely, should investors follow suit and pile into HON, or take a wait-and-see approach to this evolving industrial giant?

About Honeywell Stock

Charlotte-based Honeywell International Inc. (HON) fuels progress across industries with its expertise in automation, aerospace, and sustainable energy. With a market cap of $148.3 billion, Honeywell spans technology and manufacturing, crafting everything from cockpit controls to warehouse robotics and energy solutions.

Through its various segments - powered by its advanced Honeywell Forge software - the company tackles complex global challenges, investing in emerging tech and making the world smarter, safer, and greener.

Shares of the industrial giant climbed a respectable 18.3% over the past 52 weeks, with a 13.4% surge in the last three months alone. Recently, HON stock jumped 3.9%, reaching an all-time peak of $242.77 on Nov. 12, as Elliott Investment Management revealed a massive position, fueling fresh momentum in the stock.

Trading at 22.41 times forward earnings, Honeywell commands a premium to many industrial peers, but is valued in line with its own historical average.

Honeywell’s Dividend History

Honeywell is also a dividend heavyweight with a track record of over two decades of consistent payouts. On Sept. 27, it announced a 4.6% sequential increase to $1.13 per share - its 15th consecutive increase to its quarterly payout in the last 14 years. This brings the annualized dividend to $4.52 per share, yielding 1.94% at current levels.

With a payout ratio of 43.2%, Honeywell balances rewarding investors with reinvesting in innovation, ensuring it stays on track as a reliable income generator while positioning itself for long-term growth.

Honeywell’s Underwhelming Q3 Report

Shares of Honeywell stumbled after a mixed Q3 earnings report that left Wall Street underwhelmed. While adjusted EPS climbed 8% year over year to $2.58, beating Wall Street's estimates by 3.2% and topping the company's guidance, revenue growth of 5.6% to $9.7 billion fell short. Earnings got a boost from below-the-line items, softening the industrial powerhouse's overall shine.

In October 2023, Honeywell restructured around automation, future aviation, and energy transition, launching operations under these megatrends by Q2 2024. Aerospace Technologies soared with 12% revenue growth in Q3, while Building Automation climbed 14%, driven by robust building solutions. Energy and Sustainability Solutions edged up just 1%, bolstered by advanced materials demand. However, Industrial Automation dipped by 5%, facing challenges in warehouse and safety technologies.

Honeywell wrapped up Q3 with $10.6 billion in cash and $2 billion in net operating cash flow, while free cash flow surged to $1.72 billion. The company has been aggressive, dropping over $9 billion on M&A so far in 2024 and about $14 billion on capex, dividends, and buybacks. With a projected $25 billion spending through 2025, Honeywell is making bold moves to secure its future.

Management revised its 2024 guidance, raising the lower end of its EPS range to guide for adjusted profits between $10.15 and $10.25. However, it trimmed revenue and FCF expectations, with sales expected between $38.6 billion and $38.8 billion, indicating modest organic growth of 3% to 4%. Operating cash flow is forecast to range from $6.2 billion to $6.5 billion, while FCF is anticipated to fall between $5.1 billion and $5.4 billion.

Analysts tracking Honeywell predict fiscal 2024 EPS to rise 11.4% to $10.20. The company’s bottom line is projected to improve by another 7.6% annually to $10.97 per share in fiscal 2025.

Elliott's Stake in Honeywell

New York-based Elliott revealed a massive position in Honeywell, advising for its split into two focused entities. Elliott managing partner Jesse Cohn and partner Marc Steinberg wrote in a letter that “the conglomerate structure that once suited Honeywell no longer does.” The activist investor argues that Honeywell’s sprawling conglomerate structure is a drag on performance, citing inconsistent financial results, lackluster stock growth, and uneven execution.

Elliott believes simplifying the business would unlock value, enhancing operational efficiency, capital allocation, and shareholder returns. Elliott sees potential for Honeywell’s stock to surge by 51% to 75% over the next two years if the split is executed. This echoes the success of companies that moved away from conglomerate models, like General Electric and United Technologies, which streamlined their operations for greater focus and growth.

Elliott’s involvement typically leads to restructuring, improved financial discipline, and a sharper focus on core competencies - leading to better market performance. Honeywell has acknowledged Elliott’s recommendation and plans to engage with the firm while continuing its portfolio optimization strategy. With revenue growth and a future spin-off of its advanced materials business planned, Honeywell’s direction could soon shift significantly, aligning with Elliott’s vision of a leaner, more efficient company.

What Do Analysts Expect for Honeywell Stock?

After Elliott’s investment announcement and its recommendation to split, brokerage firms rushed to revise their price targets. UBS led the charge, upgrading Honeywell from "Neutral" to a "Buy" with a Street-high target of $298, as the firm sees promise in Honeywell’s portfolio simplification efforts.

RBC Capital Markets bumped its target from $213 to $253, while maintaining a "Sector Perform" rating. It believes the split recommendation mirrors a sector-wide trend of simplifying portfolios into focused units. However, RBC also acknowledged Honeywell’s stock struggles, citing investor preference for higher-cyclical plays over Honeywell’s stable, high-quality earnings. 

RBC analysts also raised potential counterarguments to Elliott’s split proposal, suggesting that the breakup might not fully unlock value or could limit the opportunities for a more intricate spin-off. With only a modest 3% sum-of-the-parts discount, there is a question of whether Honeywell’s separate business units are undervalued, or simply more valuable together.

HON stock has a consensus “Moderate Buy” rating overall. Among the 21 analysts in coverage, nine suggest a “Strong Buy,” and the remaining 12 analysts recommend a “Hold.”

The stock’s mean price target is $236.10, a premium of about 4.2% to today’s close.