United Technologies is a company with a long history. The most important end markets today are aerospace, the commercial side as well as the defense. (Pratt & Whitney and UTC Aerospace Systems account for approximately 50% of revenue, with the other 50% coming from Otis Elevators and UTC Climate Controls and Security). The group is actively involved with its portfolio and over time adds new assets or breaks away from those that do not work. So sold in 2015, the helicopter manufacturer Sikorsky Aircraft and is currently in the process of taking over Rockwell Collins, which focuses on aircraft.
United Technologies has been able to increase its dividend over the past 24 years, with annual growth of 9% over the past 10 years. Although the changes in the portfolio have remained broadly stable over the past 10 years with high volatility, the company has improved its operating margin from 13% in 2008 to 14.5% in 2017. Returns were also quite volatile, but rose from $4.90 per share to $5.70 during this period. The dividend payout ratio is currently around 45%, an appropriate figure, although well above the 2008 level (around 28% at that time). This explains why the recent increases in dividends are in the low single-digit range, and thus more in line with the inflation rate.
At present, however, there is some uncertainty surrounding the company. It had been suggested that after the deal with Rockwell Collins could be a corporate split. This would also explain the relatively low price at which United is traded compared to others in the industry. The enterprise value / EBITDA ratio in each core business segment is below that of its most important competitors.
Rockwell Collins will substantially expand its aerospace and military business, a sector that has developed quite well recently. Overall, the company appears to be performing well overall, with organic revenue growth of 8% in the third quarter. Adjusted earnings were up 12%, and the company accordingly adjusted its guidance for full-year adjusted earnings accordingly.
It looks as if United Technologies, as it still is today as a group, will reach 25 years of uninterrupted dividend increase. It has already announced a dividend increase of 5% for the fourth quarter. This will lead to the achievement of this goal, provided there is no cutback by the end of next year. And splitting, if it takes place at all, will not happen overnight – so the split is not going to happen for more than a year. Meanwhile, the stock looks relatively cheap today, and United Technologies continues to refine its portfolio to support long-term growth. The stock, which pays around 2.3%, should also be interesting for value investors.
