Honeywell Is Trying to Follow in GE's Footsteps. So Far, Investors Don't Like It.

Earlier this month, industrial conglomerate Honeywell International (NASDAQ: HON) announced plans to break itself up into three stand-alone publicly traded entities. But if it was hoping to reignite investor excitement, it hasn't worked. Honeywell's stock is down this year even as the industrial sector has rallied more than 5%. Zoom out over the past five years, and Honeywell is up just 17% compared to the sector's gain of 65%.

Here's why Honeywell is breaking up, what the new business could look like, and whether the dividend stock is worth buying now.

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Honeywell's growth has ground to a halt

It wasn't long ago that General Electric was one of the most valuable companies in the world, with a market cap that peaked over $450 billion in 1999. But GE began focusing on quarterly profits at the expense of long-term vision, and its conglomerate structure became a hinderance rather than an advantage. In 2018, GE lost its spot in the storied Dow Jones Industrial Average (DJINDICES: ^DJI) as the company's stock hovered around multiyear lows.

In 2023 and 2024, GE split into three public companies -- GE Aerospace, GE Vernova, and GE HealthCare Technologies. The move was meant to unlock value by giving each business unit a clear investment thesis and an easier path to growth by avoiding the red tape that can come with a slower-moving, larger conglomerate. The strategy was a resounding success, with GE Vernova, the renewable energy business, becoming one of the best-performing stocks in the S&P 500 (SNPINDEX: ^GSPC) last year.

GEV data by YCharts

It's this model of value creation that Honeywell's investors must be hoping plays out now.

Honeywell's stock price has underperformed the industrial sector for good reasons. Its revenue and earnings growth have been poor, and the outlook for 2025 isn't great. In 2024, Honeywell grew sales and operating income by just 5%. For 2025, it expects adjusted earnings per share (EPS) growth of just 2% to 6%, or $10.10 to $10.50 per share.

As you can see in this chart, Honeywell's stock price has outpaced its earnings, operating income, and revenue growth over the last decade.

HON data by YCharts

Granted, EPS has grown faster than operating income over the past decade because Honeywell has been buying back stock and decreasing its share count. But still, Honeywell's results are quite disappointing, especially for a company with a track record of industry leadership.

Reminding Honeywell of its past success was the essence of activist investor Elliott Investment Management's 23-page letter to Honeywell in November. Similar to GE, Elliott argued that the conglomerate structure that once benefited Honeywell was now holding it back, and that the company could be far more innovative and rewarding to its shareholders if it broke up.

In addition to announcing its earnings results on Feb. 6, Honeywell released a separate press release and presentation describing its logic for breaking up. Management discussed the breakup in detail on the earnings call as well. Now, investors finally have a better idea of what the business could look like post-breakup.

The new Honeywell

Honeywell is reorganizing its four segments -- Aerospace Technologies, Industrial Automation, Building Automation, and Energy and Sustainability Solutions -- into three new companies.

Advanced Materials will be a special chemicals and materials company. The segment brought in about $4 billion in revenue in 2024.

Honeywell Aerospace builds on Honeywell's experience with auxiliary power units, engines, and Honeywell Avionics (electronic systems and equipment used in commercial and military aircraft). Honeywell Aerospace will be a supplier for virtually every commercial, defense, and space platform. Growth opportunities include updating legacy fleets with new autonomous technology, electrification, emissions reductions, and more. Honeywell Aerospace made about $15 billion in 2024 revenue.

Last year, Honeywell Automation had about $18 billion in revenue. Honeywell Automation has a multidecade track record in industrial, energy, process, and building end markets. The company's services, software, and technology improves efficiency for building processes, warehouses, manufacturing, and bridges the gap between automation and autonomy. Honeywell CEO Vimal Kapur said the following on the fourth-quarter earnings call:

In an automated facility, machines with preprogrammed instructions and deterministic outcomes govern the industrial process. But in an autonomous facility, systems or machines can analyze years of historical data and make recommendations and decisions that adapt to new conditions, changing environments, or unanticipated problems. We believe this momentum will only accelerate in coming years and continue to drive increased demand for high-quality sensors, controls, process, and software technology, all of which are right in Honeywell's wheelhouse.

In sum, Honeywell Automation will focus on digital transformation, energy security, and industrial autonomy.

Expect a prolonged turnaround

As my colleague Lee Samaha points out, Honeywell Aerospace's operating margins are lower than its peers', and Honeywell Automation's organic sales growth is declining. So Honeywell trades at a discount to comparable companies not because the conglomerate structure is hiding its value, but because the business isn't as strong.

So, unlike GE, Honeywell's spin-off probably won't automatically translate into shareholder value creation. What's more, the spin-off isn't even expected to be complete until the second half of 2026. And with weak guidance for 2025, there's no clear near-term upside for owning Honeywell.

The good news is that Honeywell pays an attractive dividend and has a reasonable valuation. Honeywell has raised its dividend for 14 consecutive years and currently yields 2.2% -- a full percentage point above the S&P 500 average of 1.2%.

Based on EPS of $10.30 -- which is the midpoint of 2025 adjusted EPS guidance -- and a share price around $210 at the close of Wednesday's trading, Honeywell has a forward adjusted price-to-earnings ratio around 20 -- which is a good deal if Honeywell can return to growth. However, if Honeywell remains a low-growth company, that valuation will be decent at best. For example, Lockheed Martin, a major defense contractor growing earnings at a slow and steady rate, has a higher yield and a lower valuation than Honeywell.

Honeywell could be worth a closer look

There's an inherent amount of speculation that comes with approaching Honeywell right now. In hindsight, the stock could look like a bargain if it can spur innovation and accelerate earnings growth as three separate companies. But if that doesn't happen, there are better deals out there for value and income investors.

Therefore, investors should only buy Honeywell if they believe the business has operational advantages that the conglomerate model has squandered. But it's also OK to take a wait-and-see approach to Honeywell.

Another idea is to identify the part of the company most attractive to you and then invest in that entity post-break up. As we saw with GE, each entity has a different investment thesis, dividend yield, and balance sheet.

In sum, just because Honeywell is down over 10% year-to-date doesn't automatically make it a great value, but Honeywell could still be worth buying if you believe the spin-off will produce gains down the road.

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Daniel Foelber has positions in Lockheed Martin. The Motley Fool has positions in and recommends GE HealthCare Technologies. The Motley Fool recommends GE Aerospace and Lockheed Martin. The Motley Fool has a disclosure policy.