Dividend Farming Scorecard: United Technologies (UTX)

As a fan of aerospace ventures, I frequently look for investment opportunities in that sector – assuming they meet my basic criteria.  Because I enjoy things that fly doesn’t mean I’ll buy an interest in a company in that sector if it doesn’t meet my needs.

In an earlier post I looked at General Dynamics (GD) which held promise.  I’ll keep an eye on it, but thought I’d see if there were other possibilities in that sector as well.  As a result, I’m reviewing United Technologies (UTX) which is listed as a Champion in the DRIP Investing CCC list.

UTX: A Dividend Champion

The table below offers a summary of the criteria I explore within my selection process as applied to United Technologies on January 25, 2019.  Financial data was sourced from Yahoo.Finance.com.  The dividend history is courtesy of DRiPInvesting.org.

FACTOR	TARGET METRICS	UTX
CCC List	Champion	Champion
Current Yield	4.0%	2.45%
Company Profile	Red Flags	Treasury Stock?
Industry Leadership	Top 10	#3
Market Cap	$10 B+	$99.9 B+
P/E	< 20	17.8
P/B	< 2	2.5
Debt / Equity	< 1	1.1*
Dividend History	25 Years	25
12 Month Price Range	Lower Half	Top 10%
Dividend Payout Ratio	< 75%	44%
Portfolio Weight	Max of Slightly Over	Under

The first column lists major factors I review.  The middle column includes target benchmarks.  The last column highlights United Technology’s metrics so I can see how well they align with my benchmarks.

CCC List: The list comprises firms found on the DRIPinvesting.org web site specified as Champions, Contenders, and Challengers.  UTX is listed as a Champion so it’s off to a good start.

Current Yield:  UTX’s yield is currently 2.45% which is less than 75% of my target yield.

Company Profile:  UTX is involved in much more than aerospace defense contracting.  It also produces elevators and escalators, climate control and security systems, and space products and systems.

Industry Leadership:  Army-Technology.com listed UTX as the third largest aerospace / defense firm behind only Boeing and Airbus.

Market Capitalization:  UTX’s market cap stands at $99.9 billion which puts it in good stead.

Price to Earnings:  The P/E of 17.8 is within my range, so that’s good.

Price to Book:  P/B is just over my target at 2.5, which by itself doesn’t completely rule it out depending on other metrics.

Debt to Equity:  D/E is just over 1 as well – with an asterisk.  UTX carries over $43 B in company Treasury Stock which, on paper, obliterates all owner’s equity.  And then some.  If the company reissues the stock to generate cash or uses it for acquisitions that add value and reconstitute the negative owner’s equity, that’s not bad.  On the flip side, if all that stock is released back on the market, it will dilute earnings and probably the dividend yield which doesn’t help the Dividend Farming cause.  In any event, the D/E of just over 1 doesn’t consider the Treasury Stock.  If it did, the effect would put D/E so far out of range as to eliminate the stock from contention.  Management’s stewardship will determine whether it gets worked out well or poorly.  In either case, it’s likely outside the Dividend Farmer’s conservative range.

Dividend History:  25 consecutive years of dividends put UTX in with the Champions, which is a plus but the asterisk still looms.

Price Range:  The price range of UTX as of 1.25.19 is within 10% of its trailing 12-month (TTM) high and doesn’t currently appear to be a bargain.  At $115.81 and trending upward, it isn’t doing my dividend yield target any favors.

Payout Ratio:  The payout ratio is 44% falling well below my upper limit.  There’s plenty of room for growth but the Dividend Growth Rate (DRG) tracked by DRIP Investing has tailed off to 3.8% from its 10-year mark of 9%.  Maybe it was conserving cash to buy back its stock but doing so drives up the equity sapping Treasury Stock figure already mentioned.

Portfolio Distribution:  From a portfolio standpoint UTX would represent a significantly underweight position.  One that would be nice to bulk up if the right opportunity presented itself.

 

Analysis: 

For the most part, the metrics and history for UTX are solid.  The equity position effects of the Treasury Stock represent a deal of uncertainty for me.  I may need to study the use of Treasury Stock to a greater degree but I believe that companies can use it to generate great value while others mismanage it destroying value.  I don’t know enough about UTX’s management to offer an opinion on how that will play out.  Consequently, I can exercise due diligence to enlighten myself on the situation or I can deploy that time and effort in the investigation of other firms that may offer less uncertainty.  As much as I like aviation and aerospace, I believe I’ll put the energy to use elsewhere. 

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions expressed here should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.