Honeywell International (HON -1.01%) surged 3.7% on Dec. 16, likely in response to a press release that stated the company was considering the separation of its aerospace segment. Up until now, a potential breakup of the industrial conglomerate was merely speculation.
Below is a look at Honeywell's recent transformation, the pros and cons of a breakup, and an analysis to see if the dividend stock is worth buying now.
Image source: Getty Images.
A push for change
Honeywell hit an all-time high last month on news that activist investor Elliott Investment Management (Elliott) had amassed a more than $5 billion position in the stock, representing a 3% to 4% stake in the company. Elliott published a letter stating the reasons for the investment, including Honeywell's prior track record for industry-beating returns and why the company had lagged its peers in returns in recent years. The thesis of the letter was the following:
We believe these challenges have a clear cause and a straightforward solution: The conglomerate structure that once suited Honeywell no longer does, and the time has come to embrace simplification.
Elliott's solution is to spin off the aerospace segment, which is Honeywell's largest business by revenue and operating income, into an independent company called Honeywell Aerospace. Then it would have another company called Honeywell Automation, which would focus on industrial automation, building automation, and energy and sustainability solutions. To quote the letter:
Honeywell today suffers from operational issues that are common to conglomerates: specifically, its smaller businesses suffer from a lack of management attention, its larger businesses suffer from competition for investment dollars with other parts of the portfolio, and the whole conglomerate suffers from the difficulty of managing such a large and sprawling organization.
By spinning off into separate business units, Honeywell could improve from flexibility, which could spur innovation and help the company become an innovator once again.
Unlocking value
Honeywell already recognizes that its current model requires an overhaul. Vimal Kapur stepped in as CEO in June 2023 and began executing a companywide overhaul to turn things around.
The essence of the plan was to focus on the company's three highest-conviction megatrends -- automation, the future of aviation, and the energy transition -- by reexamining Honeywell's existing portfolio and engaging in mergers and acquisitions. Since December 2023, Honeywell has made around $9 billion in acquisitions, announced a plan to spin off its advanced materials business, and entered into an agreement to divest its personal-protective-equipment business.
The timing of Elliott's proposed spin-off makes sense, given that Honeywell is already making big changes across its businesses. In Honeywell's Dec. 16 press release, Kapur said, "Honeywell's Board of Directors remains committed to maximizing shareholder value creation, and any decision will be evaluated against that goal." This means that all ideas are on the table. Honeywell also said it would provide an update in its fourth-quarter 2024 earnings release (expected in late January).
Elliott published a short press release on Dec. 16, cheering Honeywell's decision:
Elliott welcomes Honeywell's announcement today of its ongoing review of strategic alternatives, including the separation of its Aerospace business. We believe the portfolio transformation Vimal and his team are leading represents the right course for Honeywell, and we look forward to the upcoming completion of the review and to supporting Honeywell as it implements the necessary steps to realize its full value.
Honeywell is chock-full of potential
Given that Honeywell has already engaged in agreements to sell off certain business units, there's a real possibility we could see a major breakup. There have been recent examples of breakups going well -- namely GE, which has seen immense shareholder value creation since it broke into three entities: GE Aerospace, GE HealthCare, and GE Vernova.
Although there is potential for Honeywell to be a long-term winner post-breakup, investors should expect a bumpy ride. Honeywell's slew of acquisitions over the last year were likely made under the assumption it would stay a conglomerate. Breaking off those acquisitions into different stand-alone companies could be a bit messy.
Honeywell has paid and raised its dividend for 14 consecutive years and was added to the Dow Jones Industrial Average in 2020. The conglomerate model isn't perfect but provides diversification and stability -- setting the stage for consistent dividend raises from the blue chip company. Post-breakup, I would guess that Honeywell Automation would stay in the Dow and the other entities would no longer be Dow components. However, it's unclear what each company's dividend structure would look like.
All told, Honeywell's breakup looks like a good idea. Given the company's potential in the Industrial Internet of Things, it has been surprising to see such mediocre growth -- both in terms of Honeywell's earnings and the stock price. Over the last five years, the stock has produced a total return (capital gains plus dividends) of 48.3%, compared to an 83.8% total return for the industrial sector and 106% for the S&P 500.
The decision on whether or not to buy Honeywell right now comes down to preference. Some folks may be interested in all aspects of the business, whereas others may want to wait to see how the structure looks post-breakup -- if there is a breakup at all. The simplest solution would be to wait for Honeywell's next earnings call to better understand management's vision for the breakup.
As it stands now, Honeywell is a good value, sporting a price-to-earnings ratio of 27.3 and a dividend yield of 1.9%. If Honeywell could unlock growth with a breakup, the stock could look like an even better deal.
