Monday, July 23, 2012

United Technologies Corp. (UTX) Dividend Stock Analysis

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's portfolio includes Pratt & Whitney jet engines, Sikorsky helicopters, Otis elevators, and Carrier air conditioners, among other products.

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. The stock is trading at a 20.3% premium to its calculated fair value of $61.60. 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 19 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 $1,161 is below the $1,600 target I look for in a stock that has increased dividends as long as UTX has. If UTX grows its dividend at 8.8% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 3.1%. UTX earned a check for the Key Metric 'Years to >MMA' since its 2 years is less than the 5 year target.

Memberships and Peers: UTX is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: The Boeing Co. (BA) with a 2.4% yield, General Electric Co. (GE) with a 3.3% yield and Honeywell International Inc. (HON) with a 2.7% 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 $65.18 before UTX's NPV MMA Differential increased to the $1,600 minimum that I look for in a stock with 19 years of consecutive dividend increases. At that price the stock would yield 2.7%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,600 NPV MMA Differential, the calculated rate is 10.0%. This dividend growth rate is higher than the 8.8% 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 29% debt to total capital and an excellent free cash flow payout of 33%.

However, the company estimates the acquisition of Goodrich would dilute its EPS by $0.40 in 2012, if completed, and as with all acquisitions, there is always integration risk. As with most industrials, slowing economic growth will continue to put downward pressure on UTX's earnings. The stock is currently trading above my buy price of $61.60, so I will remain on the sidelines for now.

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 held no position in UTX (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

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(Photo Credit)

Tags: [UTX] [BA] [GE] [HON]

6 comments:

  1. Hey D4L,

    I've put the dividend history for both UTX and APD(from the historical data portion of your detailed analysis) into your Pre-Screen spreadsheet, and I'm getting different calculated dividend growth rates than the one posted in your detailed analyses.

    In your analysis of APD you post a dividend growth rate of 10.4%, but the pre-screen calculates the growth rate at 9.9%.

    For UTX the pre-screen is giving a growth rate of 9.7% and your analysis puts the growth rate at 8.8%.

    I thought it was interesting that in one case the pre-screen spreadsheet calculated a higher rate, but in the other case a lower rate.

    What's up?

    ReplyDelete
  2. Anon: What are you using for the 2012 dividend assumption and the MMA Rate input?

    Best Wishes,
    D4L

    ReplyDelete
    Replies
    1. Aha! I just pulled the annual historical dividend data from 2002 - 2011 and put those into the pre-screen, but if I use annual data from 2003 - 2011 and the project the fourth quarter dividend of 2012 and calculate that 2012 dividend I get the same numbers in the pre-screen calculation as you post in your detailed analysis.

      Much thanks - you've made some tremendous resources available on your site.

      Delete
  3. D4L,

    Another pre-screening question. I hope this one isn't going to be as silly as the last.

    If I understand you correctly, your first goal for the calculated dividend rate in cell C10 is to take the minimum of the 1, 3, 5, 7, and 10 year compounded dividend growth rates.

    If you look at the compound growth rates in cells J11 and K11, you'll find that they are always identical. Isn't this because the formula that calculates K11 only includes the data points of J9 and K9, and is therefore only calculating a one year change?

    If that's so, then the formula in L11 includes a delta of 2 years, and represents a compounded growth rate for two years, not three.

    Is is fair to conclude, then, that if one wants a compounded rate representing a delta of three full years of growth, four data points are needed; and to capture ten full years of growth, 11 years of data are necessary.

    You process gives you good results, so you can ignore this comment if it's just more silliness, but you seem to do things in such a thorough manner that if you haven't already considered this I thought you might like to have it up for grabs.

    I'm attempting to recreate your entire quantitative process in one spreadsheet of my own (it doesn't look nearly as pretty as yours does!), and I think I'm going to take this into account when deciding what counts as a 3, 5, 7, or 10 year growth rate.

    best,
    Elis

    ReplyDelete
    Replies
    1. Elis: You are technically correct. It is something I recognized years ago, but never bother changing.

      D4L

      Delete
    2. D4L,

      Excellent. Since I'm starting from scratch I'll do things that way.

      I'm also doing one other thing differently (so far). Your compounded rates in row 11 are calculated with the LOGEST function. I'm not sure I understand what that does, but I did notice that if I calculate compounded annualized rates with this formula:

      [1] (1 + Absolute Return) ^ (1 / No. of Years) - 1

      I get different results from your sheet.

      To double check I wrote in cell K12 of your Pre-Screen spreadsheet the following:

      [2] = K9*(1+K11)^($J$7-K7)

      and then dragged that through cell T12. The resulting calculations don't always match the final annual dividend in cell J9, as I believe they should.

      So what I'm using to calculate compounded rates instead of the LOGEST function is this:

      [3] = (($J$9-K9)/K9+1)^(1/($J$7-K7)) - 1

      When I use my formula [2] to double check, each calculation matches cell J9, which makes me happy.

      My wife is teasing me good for geeking out so hard on this stuff, but I'm having some serious fun (if you can't tell).

      best,
      Elis

      Delete

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