What are we looking for?
Sustainable dividends from conglomerates positioned to “unlock” value by simplifying their holdings.
The screen
Honeywell International Inc. spun off Honeywell Aerospace Inc. on June 29. That new stock now trades on the Nasdaq under the symbol HONA. At the same time, the former parent rebranded itself as Honeywell Technologies; it continues to trade under the HON symbol on Nasdaq.
This latest Honeywell split caps the industrial conglomerate’s plan to separate into three independent companies. The move – spurred by activist investor Elliott Investment Management – is meant to shrink Honeywell’s “holding company discount.” That’s the tendency for multifaceted conglomerates to trade for less than the total value of their various parts.
A split can narrow that valuation gap, with a holding company’s share price often rising after its breakup into constituent parts. Essentially, the market finds it easier to assess the value of any “pure-play” companies formed by the split.
To find more conglomerates likely to gain by simplifying their holdings, we started with an extensive list of dividend-paying Canadian and U.S. companies. We then singled out conglomerates with strong breakup potential and solid growth prospects. From there, we applied our TSI Dividend Sustainability Rating System, which awards points to a stock based on key factors:
- One point for five years of continuous dividend payments – two points for more than five
- Two points if it has raised the payment in the past five years
- One point for management’s commitment to dividends
- One point for operating in non-cyclical industries
- One point for limited exposure to foreign currency rates and freedom from political interference
- Two points for a strong balance sheet, including manageable debt and adequate cash
- Two points for a long-term record of positive earnings and cash flow sufficient to cover dividend payments
- One point for an industry leader
Companies with 10 to 12 points have the most secure dividends, or the highest sustainability. Those with seven to nine points have above average sustainability. Average sustainability is at four to six points, and below average sustainability is one to three points.
More about TSI Network
TSI Network is the online home of the Successful Investor Inc. – the group of widely followed Canadian investment newsletters by editor and publisher Pat McKeough. They include our award-winning flagship newsletter, The Successful Investor, and the TSI Dividend Advisor. TSI Network is also affiliated with Successful Investor Wealth Management.
What we found
Our TSI Dividend Sustainability Rating System generated five stocks:
Montreal-based Power Corp. of Canada POW-T holds controlling interest in Great-West Lifeco Inc., IGM Financial Inc. and much more.
Calgary-headquartered ATCO Ltd. ACO-X-T owns 52.5 per cent of Canadian Utilities Ltd. but also 100 per cent of ATCO Structures & Logistics and 40 per cent of Neltume Ports; the latter operates 23 ports and related operations in South America and the U.S.
Illinois Tool Works Inc. ITW-N, based in Chicago, has 88 divisions in 49 countries. It has seven diverse and mostly unrelated segments: Automotive OEM; Food Equipment; Test & Measurement and Electronics; Welding; Polymers & Fluids; Construction Products; and Specialty Products.
Global conglomerate 3M Co. MMM-N, with headquarters in Minnesota, sells a wide array of products with little overlap and significant breakup potential. In fact, it spun off its health care unit as Solventum Corp. in 2024.
And finally, Dover Corp. DOV-N, headquartered in Downers Grove, Ill., is a widely diversified manufacturer with five operating segments well suited for spinoffs: Pumps & Process Solutions, Clean Energy & Fueling, Climate & Sustainability Technologies, Imaging & Identification and Engineered Products.
We advise investors to do additional research on investments we identify here.
Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.