This article originally appeared on The DIV-Net June 29, 2009.
Linked here is a detailed quantitative analysis of United Technologies Corp. (UTX). It is important to note that this is the first week of using my updated analysis model, so you will see some changes from earlier analyses. Below are some highlights from the above linked analysis:
Company Description: United Technologies Corp. is an aerospace-industrial conglomerate with a portfolio including Pratt & Whitney jet engines, Sikorsky helicopters, Otis elevators and Carrier air conditioners, among other products.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
UTX is trading at a discount to 1.), 2.) and 3.) above. Since UTX’s tangible book value is not meaningful, a Graham number can not be calculated. UTX is trading at a 29.5% discount to its calculated fair value of $73.14. UTX earned a Star in this section since it is trading at a fair value.
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:
- Free Cash Flow Payout
- Debt To Total Capital
- Key Metrics
- Dividend Growth Rate
- Years of Div. Growth
- Rolling 4-yr Div. > 15%
UTX earned three Stars in this section for 1.), 2.) 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 as a result of its most recent Debt to Total Capital being less than 45%. UTX earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1999-2002, 2000-2003, 2001-2004, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. UTX has paid a cash dividend to shareholders every year since 1936 and has increased its dividend payments for 17 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)? 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:
- NPV MMA Diff.
- Years to > MMA
UTX earned a Star in this section for its NPV MMA Diff. of the $6,624. This amount is in excess of the $1,800 target I look for in a stock that has increased dividends as long as UTX has. If UTX grows its dividend at 15.0% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 4.06%. UTX earned a check for the Key Metric ‘Years to >MMA’ since its 3 years is less than the 5 year target.
Other: UTX is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. Over the last ten years, UTX has shown steady growth in both earnings and dividends. UTX has a strong balance sheet with 38% debt to total capital and an excellent free cash flow payout of 29%. UTX should benefit from large backlogs at Airbus and Boeing, moderate demand for global infrastructure, and strong demand for military helicopters. Future risks could include a prolonged downturn in U.S. residential housing market, slowing of growth in commercial construction markets, and prolonged global recession.
Conclusion: UTX earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks UTX as a 5 Star-Strong Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $82.70 before UTX’s NPV MMA Differential fell to the $1,800 that I like to see for a stock with 17 consecutive years of dividend increases. At that price the stock would yield 1.86%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,800 NPV MMA Differential, the calculated rate is 10.7%. This dividend growth rate is well below the 15.0% used in this analysis, thus providing a margin of safety. UTX has a risk rating of 1.50 which classifies it as a low risk stock.
UTX is trading below its buy price of $73.14 and its 2.99% dividend yield is consistent with the 3.00% minimum that I am currently looking for. I would be very comfortable adding to my position at this price as my allocation allows. For additional information, including the stock’s dividend history, please refer to its data page.
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.
As noted above, this is the first week of using my updated analysis model, so you will see some problems or error, be sure to let me know.
Full Disclosure: At the time of this writing, I was long in UTX (3.2% of my Income Portfolio).
What are your thoughts on UTX?