Honeywell International Inc. HON recently announced that it aims to spin off its advanced materials business into a new public company. The company plans to carry out the spin-off to shareowners in a tax-efficient manner. 

Honeywell's advanced materials business provides specialty chemicals and materials to various industries, including aerospace, automotive and electronics. It features brands like Solstice, Spectra, Hydranal, Aclar and many more. In 2024, the advanced materials business is expected to generate approximately $3.8 billion in revenues, with the anticipated EBITDA margin exceeding 25%.

Inside the Headlines

Honeywell believes that the high demand for advanced specialty chemicals globally will create a good opportunity for the advanced materials business to operate independently. This new entity will concentrate on innovation, focusing on sustainable solutions and next-generation products to enhance shareholder value.

The spin-off of the advanced materials business aligns with Honeywell's strategy to optimize its portfolio. With the help of strategic acquisitions and the divestiture of non-core businesses, HON aims to strengthen its focus on key megatrends: automation, the future of aviation and energy transition.

The planned spin-off is expected to create value for its shareholders by providing both Honeywell and the advanced materials business with a streamlined focus and increased financial flexibility. The latest spin-off decision follows four recent acquisitions made by HON, namely Carrier Access Solutions, Civitanavi, CAES and Air Products' liquefied natural gas (LNG) business. With ongoing acquisitions, the company is on track to exceed its commitment to invest $25 billion in high-return opportunities, positioning itself for improved growth and enhanced cash flow.

Subject to regulatory approvals and customary closing conditions, the tax-free spin-off is expected to be completed by the end of 2025 or in early 2026. This transaction will not affect Honeywell's 2024 guidance.

Existing Business Scenario

Honeywell is experiencing strength in its commercial aviation aftermarket business driven by solid demand in the air transport and business aviation markets. Also, strength in the company’s commercial aviation original equipment business backed by an improvement in build rates and an increase in air transport hours has been favorable. In the quarters ahead, it expects the Aerospace segment to benefit from strong demand in commercial aviation, growth in air transport flight hours and higher shipset deliveries. Strength in its defense and space business, owing to stable U.S. and international defense spending volumes and sustained demand from the current geopolitical climate, is also likely to be beneficial.

Honeywell’s commitment to rewarding its shareholders through dividends and share buybacks is encouraging. In September 2023, it hiked its quarterly dividend by approximately 5% to $1.08 per share (annually: $4.32). This marks the company’s 14th consecutive dividend hike since 2010. In the first six months of 2024, it paid out dividends of $1.4 billion and repurchased shares worth $1.2 billion. In 2023, dividends amounted to $2.86 billion and share repurchases were $3.72 billion. Strong free cash flow generation supports the company’s shareholder-friendly activities. Honeywell expects free cash flow to be in the range of $5.5-$5.9 billion for 2024.

However, the company has been witnessing weakness in the Industrial Automation segment. Weakness in the warehouse and workflow solutions businesses due to lower demand for projects has been affecting the segment's performance. Also, the weakened demand for personal protective equipment within the sensing and safety technologies business is worrisome. Continued softness in the warehouse automation business owing to lower investments in the market remains a concern for the segment.

Honeywell’s diversified portfolio of solutions serves customers globally with aerospace products and services, energy-efficient products and solutions for businesses, process technology, specialty chemicals, electronic and advanced materials for refining and petrochemicals. The company, which belongs to the Zacks Diversified Operations industry, faces stiff competition from competitors like Carlisle Companies Incorporated CSL, 3M Company MMM and ITT Inc. ITT.