Madison Investments, an independently-owned investment firm, published its third-quarter Madison Dividend Income Fund commentary – a copy of which can be downloaded here. During the third quarter of 2020, the Fund returned 6.8%, underperforming its benchmark, the S&P 500 Index which returned 8.9% in the same period. You should check out Madison Investments' top 5 stock picks for investors to buy right now, which could be the biggest winners of 2021.
In the Q3 2020 Investor Letter, Madison Investments highlighted a few stocks and Honeywell International Inc (NYSE:HON) is one of them. Honeywell International Inc (NYSE:HON) is a leading global manufacturer of security and automation solutions for commercial applications. In the last three months, Honeywell International Inc (NYSE:HON) stock gained 21.8% and on January 12th it had a closing price of $208.88. Here is what Madison Investments said:
"This quarter we are highlighting Honeywell (HON) as a relative yield example within Industrials. HON is a leading industrial conglomerate with an increasing focus on software and automation. We believe its global scale, history of innovation and strong culture focused on continuous operational efficiency create a sustainable competitive advantage. HON operates four segments including Aerospace, Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. These businesses serve diverse end markets including aerospace, U.S. defense contractors, e-commerce and oil and gas customers.
Our thesis on HON is that it will successfully leverage its software technology across its huge installed base of customers and products. Its installed base includes approximately 36,000 auxiliary power units, 25,000 engines, 20,000 wheels and brakes, 20,000 flight management systems and 10,000 units of communication hardware. Importantly, HON software technology is integrated into mission-critical operations of its customers including cockpit control in aircraft flights, warehouse automation in manufacturing and connected solutions in commercial buildings. We believe its technology advantage is due to above-average spending on research and development (R&D). For example, in key aerospace businesses, HON spends 4.5% of sales on R&D compared to 2-3% spending by most competitors.
The fund purchased HON in the quarter after it reached a reasonable valuation with an attractive dividend yield and relative dividend yield versus the S&P 500. At the purchase price in the upper $160s, the stock traded for less than 20x estimated earnings expected over the forward 12 months. We believe this valuation can grow over time if HON continues to innovate and create new products, while its underlying end markets like aerospace recover over time. It also has an A rated balance sheet (as rated by S&P), an absolute dividend yield of 2.2%, and an attractive relative yield of 1.3x versus the S&P 500, which is the highest relative yield since 2012, as shown below. The company also has a history of dividend increases as it has grown dividends per share by 12.5% per year on average over the last five years.
Risks to the thesis include a prolonged economic downturn that results in sustainable declines in its key end markets like aerospace. We estimate about 40-45% of sales are exposed to these end markets. Other risks include lost market share if customers don’t like its evolving software offerings, and the risk the company makes a value-destroying acquisition. We think this last risk is relatively low as HON has a history of successful acquisitions."
Earlier this week, we published an article revealing that Honeywell International Inc (NYSE:HON) was one of the 10 best defence stocks to buy now for 2021.
In Q3 2020, the number of bullish hedge fund positions on Honeywell International Inc (NYSE:HON) stock decreased by about 18% from the previous quarter, so a number of other hedge fund managers don't believe in Honeywell's growth potential. Our calculations showed that Honeywell International Inc (NYSE:HON) isn't ranked among the 30 most popular stocks among hedge funds.