Seeking Alpha
Long/short equity, portfolio strategy, dividend investing, growth
Profile| Send Message|
( followers)

Summary

  • United Technologies diversified business model set it up to make big profits.
  • The company has the ability to sustain dividend growth.
  • United Technologies is an astute investment.

United Technologies (NYSE:UTX) recently announced a quarterly dividend of $0.59 per share. In the past five years, UTX has been able to increase dividends by 53.25%, which represents a 10% increase in dividends each year over the past five years. UTX has been generating massive profits over the years with its strong product portfolio, diversified global footprints, smart business strategy, and ability to produce innovative products, which allowed it to make a consistent increase in dividends. Furthermore, its fundamentals are also moving nicely. Its share price has gained more that 114% of value in the past five years, and the stock gained around 24.22% in the past year alone. Its price to earnings per share is in line with the industry average while forward price to earnings ratio of 15 shows more upside potential.

UTX's disciplined investment strategy, diversified portfolio, and extensive global footprints limits the impact of the economy of any single country and political environment. UTX operates in five business segments. Otis and UTX Climate, Controls, & Security are its commercial businesses, and UTX Aerospace Systems, Pratt & Whitney, and Sikorsky are its aerospace businesses. The diversified business model enhances its ability to produce more integrated solutions to its customers, accelerates innovation in sustainable designs and smart building technologies, and reduces the negative impact appearing from any business.

With the consistent growth in the economy, UTX has been generating strong growth over the years. In the past three years, it has generated revenue growth of 6.2% and an earnings growth of 9.4% compared to the industry average of 2.6% and 9.4%. Its better revenue growth over the industry average is due to its diversification to commercial and residential business and not lack of exclusiveness to the industry of Aerospace & Defense. It operates and provides original equipment manufacturing (OEM) and wide-ranging aftermarket parts and services in both aerospace and commercial businesses. Its business mix also presents the amalgamation of shorter cycles at commercial aerospace aftermarket businesses and UTX Climate, Controls, & Security and longer cycles at aerospace OEM businesses and Otis.

The business mix allows it to offset the lower growth in any business with other. The company has been experiencing mild growth in the defense business while it's OEM, commercial, and residential businesses are generating strong growth with the healing economy. In the recent quarterly results, UTX segment profits increased by 9% and operating margin expanded by 90 basis points. It commercial and residential business has generated strong growth in all parts of the world, particularly in North America and China. The company experienced lower sales in its defense business as sales were down by 2% compared to the past year quarter. However, its aftermarket and commercial OE business has generated 8% growth in sales, which offsets the lower sales in its defense business.

Overall, with the strong growth in commercial and residential business, aftermarket, and commercial OE business, UTX has been able to reaffirm forecasted earnings per share. The company is now expecting around $6.65 to $6.85 per share, representing a growth of 7-10%. Its cash generating potential is also strong as it has been generating very strong free cash flows. Its free cash flows are more than its dividend payments. In the past quarter, its free cash flows were at $860 million, and dividend payments were at $514 million. The gap between free cash flows and dividend payments will allow it make another dividend increase of 10% in the coming quarters. Furthermore, the company's cash-generating potential will expand with forecasted growth in earnings per share.

In Conclusion

UTC business mix and innovative product and technologies help it to thrive in a difficult business environment. The company has a strong order backlog, and its commercial, residential, commercial OEM, and aftermarket business are set to grow with the healing economy. Furthermore, the company is working on restructuring its business and disposing of non-core assets, which will further enhance its operating margins. It has the ability to sustain its dividend growth, and its stock is also likely to keep its momentum as the company is set to generate better profits in this year compared to the past. In my opinion, United Technologies is an astute investment.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.