Company Description: United Technologies Corp. is an aerospace-industrial conglomerate with a portfolio that includes Pratt & Whitney jet engines, Otis elevators and Carrier air conditioners, among other products. In November 2015, UTX sold its Sikorsky helicopter division to Lockheed Martin.
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. Since UTX's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 75.9% premium to its calculated fair value of $66.00. 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 24 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 $193 is below the $1,100 target I look for in a stock that has increased dividends as long as UTX has. If UTX grows its dividend at 3.8% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 2.65%. UTX earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.
Peers: The company's peer group includes: The Boeing Co. (BA) with a 2.2% yield, General Electric Co. (GE) with a 4.0% yield and Honeywell International Inc. (HON) with a 2.1% 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 $65.88 before UTX's NPV MMA Differential increased to the $1,100 minimum that I look for in a stock with 24 years of consecutive dividend increases. At that price the stock would yield 4.2%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,100 NPV MMA Differential, the calculated rate is 9.3%. This dividend growth rate is higher than the 3.8% 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 currently has a Free Cash Flow Payout of 48% (down from 122%) and a Debt To Total Capital of 48% (up from 46%). The stock is currently trading well above my calculated fair value of $66.00, so I will wait for a more opportune time before significantly adding to my position.
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 (0.7% of my Dividend Growth Portfolio). See a list of all my Dividend Growth Portfolio holdings here.
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Tags: UTX, BA, GE, HON,
