United Technologies: No Longer A Bargain

| About: United Technologies (UTX)

Summary

United Technologies is spending aggressively on capital returns placing the company near the top of any large cap stock.

The large buybacks are masking the likely net income decline for this year.

Limited growth prospects reduced the attractiveness of United Technologies above $100.

With the Honeywell International (NYSE:HON) deal on the back burner, United Technologies (NYSE:UTX) has the option of returning to aggressive capital returns. The industrial company returned a large amount of capital to shareholders last year via an accelerated stock buyback and a strong dividend.

Source: United Tech website

Like most stocks, United Technologies has already seen the stock rally from $83 at the lows last seen in February to reach $100 last week. With the stock no longer at the lows, are the prospects of the business and capital returns enough to warrant chasing the rally?

Capital Returns

United Technologies is making good on the promise to return $22 billion to shareholders via dividends and stock buybacks from 2015 through 2017. The plan got off to a fast start with a $6 billion accelerated stock buyback to end 2015.

In total, the industrial company spent $12 billion on capital returns last year alone. With a market cap of only $83 billion, United Technologies is returning a large portion of the market cap to shareholders. Accordingly, the net payout yield ranks as one of the highest in the market for March.

UTX Net Common Payout Yield (<a href=

UTX Net Common Payout Yield (TTM) data by YCharts

With a dividend yield of 2.6%, the net payout yield that combines the net stock buyback yield and the dividend yield is made up almost solely of the stock buybacks. In this market though, a yield above 13% is highly appealing.

No Growth

The big concern is that United Technologies guided to a '16 EPS of up to $6.60 after earning $6.30 last year. With the share count down up to 10% from levels during '15, the company is likely to generate lower net income this year. One has to wonder if a deal with Honeywell wasn't explored due to a lack of organic growth at United Technologies.

The good news is that share repurchases will reach $3 billion this year. When mirrored with the 2.6% dividend yield, a purchase of the stock right now will provide a roughly 6.2% yield for this year. Not bad, but the yield is nowhere near the amount offered by the leaders in the sector.

Takeaway

The problem with accelerated stock buybacks is that the market wants more consistent purchases when the stock is cheap. With the recent rally and the reduced cash available to repurchase shares this year, United Technologies is only a borderline appealing stock.

The most appealing stocks return larger amounts of capital to shareholders when the stock is cheap and not based on when cash is available to spend. In the case of United Technologies, the prospects are mixed and the stock doesn't offer any overwhelming value at $100 for the company to repurchase shares at a fast clip. The stock will probably head higher from this level, but it isn't any bargain above $100.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.