Honeywell Nears Divestment of Aerospace Division, but Is the Prestigious Dow Jones Dividend Stock a Worthy Investment Prior to 2025?
Honeywell International (HON -0.31%) witnessed a 3.7% increase on December 16, presumably due to a press release indicating the company was considering splitting its aerospace segment. Until then, the possibility of Honeywell splitting up was merely a speculation.
This piece will delve into Honeywell's recent developments, the advantages and disadvantages of splitting up, and an analysis on whether or not the dividend stock is a wise investment at present.
Time for a shakeup
In November, Honeywell hit an all-time high amid news of Elliott Investment Management amassing over $5 billion in shares, representing a 3%-4% stake in the company. The investing firm explained its decision in a letter, citing Honeywell's impressive industry-leading returns in the past and its recent underperformance in comparison to peers. The investment case was as follows:
We argue that these issues stem directly from Honeywell's conglomerate structure, a strategy that no longer aligns with its needs. Our proposed solution is to spin off the aerospace segment, Honeywell's most significant revenue and profit generator, into an independent company named Honeywell Aerospace. The remaining company would focus on industrial automation, building automation, energy, and sustainability solutions, then named Honeywell Automation.
According to the letter, Honeywell's conglomerate structure causes numerous operational challenges, including uneven management attention for smaller businesses, competition between larger businesses for investment dollars, and overall difficulty in managing a widespread enterprise.
By splitting into separate business units, Honeywell could benefit from increased flexibility, resulting in innovation and the potential for the company to become an innovator once more.
Unlocking potential
Honeywell acknowledges that its existing model requires significant revamping. New CEO Vimal Kapur assumed leadership in June 2023 and initiated a company-wide overhaul to tackle the challenges facing Honeywell.
The plan included a focus on the company's three most promising growth areas: automation, the future of aviation, and the energy transition. Kapur aimed to redefine the company's portfolio, purchase new companies, and divest non-core assets. Since December 2023, Honeywell has made nearly $9 billion in acquisitions, plans to spin off its advanced materials division, and has agreed to sell its personal protective equipment branch.
The timing of Elliott's proposed split makes sense, considering the significant changes Honeywell is implementing in its divisions. Honeywell's Dec. 16 press release mentioned Kapur's statement, "Honeywell's Board of Directors remains committed to creating shareholder value, and any decisions will be based on that objective." Essentially, all options are open. Honeywell has pledged to provide more information in its fourth-quarter 2024 earnings release (expected in late January).
Elliott released a short statement on Dec. 16, praising Honeywell's decision:
Elliott commends Honeywell's announcement of a review of strategic alternatives, including the possible division of the Aerospace division. We believe that the transformation underway by Vimal and his team is the right path for Honeywell. We eagerly anticipate the completion of the review and Honeywell's implementation of the necessary steps to maximize its potential value.
Honeywell brimming with opportunity
Given Honeywell's recent divestments, a major breakup is not an implausible possibility. Prominent examples of successful breakups include GE, which saw significant shareholder value creation following its split into three entities: GE Aerospace, GE HealthCare, and GE Vernova.
While Honeywell holds promising potential as a long-term player following a split, investors should prepare for a rocky road. Honeywell's recent acquisitions were largely made in anticipation of maintaining its role as a conglomerate. Separating these acquisitions into separate entities could create complications.
Honeywell has consistently increased and paid divids for 14 consecutive years and was added to the Dow Jones Industrial Average in 2020. The conglomerate model offers diversification and stability, fostering predictable dividend increases from this blue-chip company. Post-split, we foresee Honeywell Automation maintaining its Dow position, while the other entities may no longer qualify as Dow components. However, it remains unclear what the individual company's dividend structures would entail.
In conclusion, Honeywell's potential breakup seems like a viable move. Despite its impressive Industrial Internet of Things potential, Honeywell has displayed mediocre growth both in terms of earnings and stock performance. Over the past five years, the stock has produced a 48.3% total return, compared to 83.8% for the industrial sector and 106% for the S&P 500.
Whether or not to invest in Honeywell depends on one's preferences. Some investors may prefer Honeywell's entire offering, while others may want to observe the structure of the company post-split. The simplest option would be to wait for Honeywell's next earnings call, which can provide a clearer understanding of management's vision for the breakup.
At present, Honeywell is considered a reasonable investment, boasting a price-to-earnings ratio of 27.3 and a dividend return of 1.9%. If Honeywell manages to foster growth through a separation, its stock might appear even more enticing.
After discussing the potential benefits of splitting Honeywell into separate business units, one could argue that investing in the dividend stock of the resulting entities could prove lucrative, given the improved operational efficiency and potential for innovation. Moreover, a thorough analysis of the financial implications of the split, such as changes in the price-to-earnings ratio and dividend return, should be carried out before making an investment decision.
