Company Description: United Technologies Corp. is an aerospace-industrial conglomerate; the portfolio includes Pratt & Whitney jet engines, Sikorsky helicopters, Otis elevators, and Carrier air conditioners, among other products. In July 2012, UTX purchased aerospace competitor Goodrich.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value. See page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
UTX is trading at a premium to all four valuations above. The stock is trading at a 72.7% premium to its calculated fair value of $52.18. UTX did not earn any Stars in this section.
Dividend Analytical Data: In this section, there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt-To-Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
UTX earned two Stars in this section for 1.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. UTX earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1936 and has increased its dividend payments for 20 consecutive years.
Dividend Income Vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high-yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $393 is below the $1,500 target I look for in a stock that has increased dividends as long as UTX has. If UTX grows its dividend at 5.4% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 2.54%. UTX earned a check for the Key Metric 'Years to >MMA' since its 2 years is less than the 5-year target.
Memberships and Peers: UTX is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: The Boeing Co. (NYSE:BA) with a 2.5% yield, General Electric Co. (NYSE:GE) with a 3.4% yield and Honeywell International Inc. (NYSE:HON) with a 2.3% yield.
Conclusion: UTX did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income Vs. MMA section for a total of two Stars. This quantitatively ranks UTX as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $53.15 before UTX's NPV MMA Differential increased to the $1,500 minimum that I look for in a stock with 20 years of consecutive dividend increases. At that price, the stock would yield 4.0%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,600 NPV MMA Differential, the calculated rate is 10.4%. This dividend growth rate is higher than the 5.4% used in this analysis, thus providing no margin of safety. UTX has a risk rating of 2.00 which classifies it as a Medium risk stock.
UTX’s product leadership along with management's commitment to shareholders has produced a wide-moat. Over the last ten years, the company has shown steady growth in both earnings and dividends. UTX has a strong balance sheet with 29% debt-to-total capital and an excellent free cash flow payout of 33%.
However, the Goodrich acquisition could dilute its EPS in 2013 and provide integration risk. Since I last reviewed UTX in July 2012, its normally strong financials have weakened with debt-to-total capital slipping to 53% from 29% and free cash flow payout up to 46% from 33%. As with most industrials, slowing economic growth will continue to put downward pressure on UTX's earnings. The stock is currently trading above my buy price of $52.18, so I will remain on the sidelines for now.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in UTX (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.