Illinois Tool Works (ITW) is one of the strongest, most diversified industrial conglomerates a dividend growth investor can find. While the stock only yields 2.4% today, the company raised its dividend by 13% last quarter and continued double-digit dividend growth isn’t out of the question.

ITW possesses many of the characteristics we look for when accumulating stocks in our Top 20 Dividend Stocks portfolio. Let’s take a closer look at the business.

Business Overview

ITW was founded over 100 years ago and has grown into an extremely diversified manufacturer of specialized industrial and consumer equipment and consumables with a presence in many different end markets – automotive, construction, manufacturing, food & beverage, and more. The company has seven different business segments but estimates that around 60% of revenue comes from consumer-facing businesses with the remaining 40% coming from industrial-facing businesses.

ITW consists of hundreds of businesses it has acquired over the years. It runs a unique decentralized operating structure that empowers acquired businesses to maintain most of their culture and operations while taking advantage of ITW’s resources to better serve their customers’ needs. The company’s business model also emphasizes the 80/20 rule, encouraging each business to focus on the 20% of its customers that generate 80% of its revenues and structure its operations around growing these key relationships.

By geography, ITW generates 50% of its sales in North America, 30% in Europe, the Middle East and Africa, and 20% in Asia. The company does business in over 50 countries, but its emerging market exposure is fairly limited.

Business Analysis

Much of ITW’s historical growth was fueled by acquisitions into high-margin industrial and consumer niches. The company runs a decentralized organizational structure, which allows acquired companies to retain most of their unique culture and market knowledge to continue growing their business.

For many decades, this was a very successful strategy. However, ITW eventually grew to more than 800 regional business divisions, which became increasingly difficult to oversee and keep efficient. Over the last three years, ITW has embarked on a strategy to simplify its operations (transitioning from 800+ regional to 84 global divisions), take better advantage of its size and scale, and drive accelerated organic growth globally.

Like many conglomerates, ITW’s massive sales base contains good and bad businesses. As seen below, management has pointed out that about 45% of the company’s total revenue is healthy and expected to report organic sales growth of 6% in 2015. However, 40% of sales are not yet ready for sustainable, profitable organic growth and need some help.

Source: ITW Investor Presentation

ITW’s reported revenue has declined over the last three years as a result of the company’s portfolio management activities. From 2013-2014, ITW divested 32 businesses that generated $4.9 billion of revenue because they were operating in commoditized markets where profitable growth was harder to come by.

From 2014-2016, the company expects to exit an additional $350 million of revenue by exiting commoditized product lines to allow its divisions to focus on more profitable opportunities.

While sales have declined as a result of these moves, ITW’s profitability has soared. As seen below, the company’s operating margin and return on invested capital both increased over 500 basis points compared to 2012.