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Mon. Feb. 1, 2010

United Technologies Corp. (UTX) Dividend Stock Analysis *

This article originally appeared on The DIV-Net January 25, 2010.

Linked here is a detailed quantitative analysis of United Technologies Corp. (UTX). 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:

  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number

UTX is trading at a discount to 1.) and 2.) above. Since UTX’s tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a slight discount to its calculated fair value of $69.44. 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:

  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 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. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The stock 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%. The company 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:

  1. NPV MMA Diff.
  2. Years to > MMA

UTX earned a Star in this section for its NPV MMA Diff. of the $3,003. 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 5 years to equal a MMA yielding an estimated 20-year average rate of 3.98%.

Other: UTX is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index.

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 would need to increase to $83.47 before UTX’s NPV MMA Differential decreased to the $1,800 minimum that I look for in a stock with 17 years of consecutive dividend increases. At that price the stock would yield 1.84%.

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 13.3%. This dividend growth rate is slightly less than the 15.0% used in this analysis, thus providing only a slim margin of safety. UTX has a risk rating of 1.25 which classifies it as a low risk stock.

UTX’s product leadership 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 34% debt to total capital and an excellent free cash flow payout of 29%. Large backlogs at Airbus and Boeing, moderate demand for global infrastructure, strong demand for military helicopters and sustained productivity improvements will benefit UTX in the near-term. UTX is trading near my buy price of $69.44. However, I will limit purchases based on its low dividend yield. 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.

Full Disclosure: At the time of this writing, I was long in UTX (4.2% of my Income Portfolio). See a list of all my income holdings here.


3 Responses to “United Technologies Corp. (UTX) Dividend Stock Analysis *”

  1. Dividend Disciple says:

    D4L-

    I’d be interested to see you incorporate more information about how you manage sector diversification/allocation. For example, with the premium Data service now, you include the stock’s sector, however, you don’t really talk about your sector needs when you analyze individual stocks and the sector information is missing from the Dashboard. You do specifically mention an “allocation” comment related to stocks in your “Buy” category (or those that you might be thinking of adding even it doesn’t appear as a “buy”), but the reader cannot decipher how you came to that conclusion. Allocation based on strictly income? or sector? Would you consider possibly adding a pie chart of sector allocation for the dividend portfolio somewhere in the dashboard?

    I think investors with portfolios much smaller than yours that are just starting out should focus on buying best of breed stocks, but also maintain sector diversification. If I can only afford to add 1 healthcare stock, if I could sort the data file and compare to the dashboard to see which you own, how they rate, etc. in order to aid my decision.

    Also, I believe in previous articles you’ve written about which sectors provide the best balance of yield and growth. You’ve talked about how utility stocks are not necessarily the best growth candidates. By showing a graph of your portfolio by sector, I think investors could get a better understanding of which sectors provide the best balance of growth/yield. This would also allow you to comment on any changes from the estimated allocation (if you had one) and how you determine which sectors to increase exposure to (i.e. “T”).

    Just some thoughts. I’ve created tables with sector analysis from your previous articlces, but I think the user might enjoy it if you added in this area. Love the service, thanks for all your hard work.

  2. DD: I do focus on my allocation overall and report on it once a quarter. See this article:
    http://dividendsvalue.com/162/measuring-asset-allocation-across-your-entire-portfolio/

    My last allocation update:
    http://dividendsvalue.com/5546/2009-q4-progress-review/

    I limit each sector to no mare than 10%, each stock to no more than 5% and each income fund to no more than 10%.

    As a general rule, I try to buy the best dividend stock available and use my non-income portfolios to keep my sector allocation in line.

    Thanks for the comments!
    D4L

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