Prediction: After Gaining Just 19% in 5 years, This Dividend King Will Beat the S&P 500 Through 2030

The S&P 500 (SNPINDEX: ^GSPC) is up a whopping 96% over the last five years -- without even factoring in dividends. But industrial giant Illinois Tool Works (NYSE: ITW), commonly known as ITW, has gone nowhere over the last couple of years and has gained less than 20% over the last five years.

Here's why ITW has what it takes to flip the script and produce a higher total return than the S&P 500 through 2030.

Image source: Getty Images.

An industrywide slowdown

ITW is an industrial conglomerate with a globally diversified business spanning seven core segments -- automotive original equipment manufacturing, construction products, food equipment, polymers and fluids, specialty products, test and measurement and electronics, and welding. In 2024, no single segment made up more than 20% of sales -- showcasing the fact that ITW doesn't depend on a single segment or end market.

But ITW's growth has ground to a halt in recent years, due to an unfavorable medley of supply chain disruptions, tariff uncertainty, geopolitical tensions, and relatively high interest rates. In its third-quarter 2025 earnings presentation, ITW said that it only expects earnings growth of 3% for the full year. That is mediocre, but slightly higher than its initial full-year forecast from February.

ITW is in a similar boat to companies like Home Depot, Sherwin-Williams, and Stanley Black & Decker -- all of which are consumer-facing and experiencing sales slowdowns. In contrast, many industrials that are enterprise-facing -- such as original equipment manufacturers like Cummins and Caterpillar -- are generating record sales.

ITW's competitive advantages

Despite these challenges, ITW said in its latest earnings presentations that it continues to deliver above-market organic growth -- largely thanks to its Customer-Back Innovation strategy. The strategy centers ITW's product development pipeline around customer needs rather than developing ideas and hoping they resonate with customers.

ITW is a large business with a lot of moving parts. So, naturally, you may think that the company would struggle to be flexible and innovative. ITW counteracts the limitations of its conglomerate structure through a decentralized, entrepreneurial culture that supports small, nimble teams that can respond to customer needs. It also has a trade secret called the 80/20 Front-to-Back Process -- a set of proprietary tools and methodologies that are instrumental to ITW's high margins and efficiency.

These qualities help ITW generate high operating margins even during challenging times. ITW is guiding for full-year 2025 operating margins of 26% to 27%, which is impeccable.

ITW's elite dividend

ITW's efficiency enables it to convert a substantial portion of earnings into free cash flow (FCF), which it returns to shareholders through raises and stock buybacks.

For 2025, ITW is guiding for generally accepted accounting principles (GAAP) earnings per share of $10.40 to $10.50, and it plans to convert 100% of those earnings into FCF. On Aug. 1, ITW announced its 62nd consecutive annual dividend raise, bumping the payout to $6.44 per share per year. Since its earnings and FCF far exceed its payout, ITW can consistently buy back stock, reducing the outstanding share count and accelerating earnings-per-share growth.

In addition to being an ultra-reliable dividend stock with a solid 2.6% yield, ITW is also a decent value -- trading at 23.4 times the midpoint of its 2025 earnings guidance. It's not dirt cheap, but it's reasonable for a blue chip company like ITW.

A great buy for value investors

Given the near-term challenges across ITW's end markets, it would be difficult for ITW to outperform the S&P 500 if the growth-driven rally continues. However, given ITW's reasonable valuation and track record of dividend increases, it would likely outperform the S&P 500 in a sell-off, especially one driven by a pullback in tech stocks.

Regardless of how ITW fares relative to the S&P 500 over the coming years, the company is well positioned to reward long-term shareholders. ITW is a coiled spring for a recovery in its consumer-facing segments. And despite the demand slowdown, ITW continues to operate with ultra-high margins while generating a boatload of FCF. Meaning that if revenue growth begins to accelerate, the stock could look too cheap to ignore.

Add it all up, and ITW is an excellent choice for risk-averse investors looking for a high-quality value stock to buy now.

Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cummins and Home Depot. The Motley Fool recommends Illinois Tool Works and Sherwin-Williams. The Motley Fool has a disclosure policy.