Company Description: United Technologies Corp. is an aerospace-industrial conglomerate with a portfolio includes Pratt & Whitney jet engines, 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. 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 57.4% premium to its calculated fair value of $62.54. 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 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%. 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 22 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 $349 is below the $1,300 target I look for in a stock that has increased dividends as long as UTX has. The stock's current yield of 2.6% exceeds the 2.51% estimated 20-year average MMA rate.
Peers: The company's peer group includes: The Boeing Co. (BA) with a 2.5% yield, General Electric Co. (GE) with a 3.1% yield and Honeywell International Inc. (HON) with a 2.0% yield.
Conclusion: UTX did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks UTX as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $59.37 before UTX's NPV MMA Differential increased to the $1,300 minimum that I look for in a stock with 22 years of consecutive dividend increases. At that price the stock would yield 4.3%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,300 NPV MMA Differential, the calculated rate is 9.0%. This dividend growth rate is higher than the 4.1% used in this analysis, thus providing no margin of safety. UTX has a risk rating of 1.75 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 43% debt to total capital and an excellent free cash flow payout of 54%. The stock is currently trading well above my calculated fair value of $62.54, 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 (0.4% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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Tags: UTX, BA, GE, HON