Updated on April 14th, 2020 by Eli Inkrot
Note: This article has been updated to reflect the merger of United Technologies and Raytheon.
The Dividend Aristocrats are an exclusive group of companies that have increased their dividend for at least 25 consecutive years. We believe the Dividend Aristocrats are among the highest-quality dividend stocks to buy and hold for the long-term.
With this in mind, we created a downloadable Excel list of all the Dividend Aristocrats, along with relevant financial metrics like dividend yields, price-to-earnings ratios, and payout ratios. You can download your free copy of the Dividend Aristocrats list by clicking on the link below:
While the dividend growth path of these companies is a historic and often storied one, companies can be included for a variety of reasons, such as spin-offs and mergers. Raytheon Technologies (RTX) is a good example of this.
Previously, United Technologies had a dividend growth streak of 26 years. However, the company has recently been transformed. On April 3rd, 2020 United Technologies spun off its Carrier (CARR) and Otis (OTIS) business segments into two independent, publicly traded businesses.
The remainder of United Technologies – which included Collins Aerospace Systems and Pratt & Whitney – was merged with Raytheon which had its own history of increasing its dividend for 15 years.
The new company was renamed Raytheon Technologies (RTX). As a result, all three companies – Raytheon Technologies, Carrier and Otis – qualify as Dividend Aristocrats. Therefore, we have updated our Dividend Aristocrats list accordingly, and we are providing analysis on all three stocks individually.
This article will discuss the business structure, growth prospects, and five-year expected returns for Raytheon Technologies.
Raytheon Technologies, which is 57% owned by legacy UTX shareholders, trades with a market cap of over $100 billion and is headquartered in Waltham, MA. It is one of the largest aerospace and defense companies in the world with $74 billion in pro forma 2019 sales and a global team of 195,000 employees, including 60,000 engineers and scientists.
The merger of equals brought together two giants in the industrial sector.
Source: Merger presentation
The company is divided up into four segments. First, Collins Aerospace Systems specializes in aero-structures, avionics, interiors, mechanical systems, mission systems and power controls that serve the commercial, regional, business aviation and military sectors. Second, Pratt & Whitney operates in designing, manufacturing and servicing aircraft engines and auxiliary power systems for commercial, military and business aircraft.
Next, Raytheon Intelligence & Space specializes in developing sensors, training and cyber and software solutions. Lastly, Raytheon Missiles & Defense provides the industry’s most advanced end-to-end solutions to detect, track and engage treats.
Last year, these segments generated sales of approximately $26 billion, $21 billion, $15 billion and $16 billion respectively. While the past results of United Technologies and Raytheon are not a perfect gauge for the newly merged company, they can be instructive in detailing how the businesses were performing leading up to this year.
On January 28th, 2020 United Technologies reported earnings results for the fourth quarter and full year. Adjusted earnings-per-share totaled $1.94, $0.10 above estimates, but $0.01 below the previous year. Revenue grew 8.4% to $19.6 billion, $200 million higher than expected.
For the full year, adjusted earnings-per-share grew 9% to $8.26, $0.16 above the midpoint of the company’s guidance. Revenue improved 16% to $77 billion. Top and bottom-line totals for the year were a record. The company had organic growth of 1% for the quarter and 5% for 2019. Collins Aerospace grew 32% for the quarter and 1% organically. Pratt & Whitney had organic growth of 2%.
Meanwhile, on January 30th, 2020 Raytheon reported fourth-quarter and full-year 2019 financial results. Company-wide net sales increased 6.5% to $7.842 billion and diluted EPS from continuing operations increased 7.8% to $3.16 from $2.93 on a year-over-year basis. The company had $12.058 billion in bookings and the backlog grew to a record $48.752 billion.
All five business segments at Raytheon, which have been condensed into the segments mentioned above, showed growth. Integrated Defense Systems net sales increased 18% due to higher international sales. Revenue for the Intelligence, Information and Services segment increased 6% driven by higher sales in classified cyber and space programs.
Revenue for Missile Systems increased 1% due to higher sales in classified programs and other programs. Revenue for Space and Airborne Systems increased 10% from strength in classified programs and the Next Generation Overhead Persistent Infrared program. Forcepoint revenue grew 3%.
For the year, Raytheon’s sales increased 16% to $36.340 billion from $32.162 billion in 2018 and diluted earnings per share increased 17.4% to $11.92 from $10.15 in 2018.
Raytheon Technologies has not yet reported earnings as a merged company. As such, looking at the histories of United Technologies and Raytheon can be useful. In the last decade, United Technologies was able to grow earnings-per-share by a 7.2% annual compound rate.
Meanwhile, Raytheon has been able to grow its earnings-per-share by an average compound growth rate of 9.3% per annum for the last 10 years.
Looking forward, the outlook for Pratt & Whitney is for mid-single digit sales growth, while Collins Aerospace is anticipated to be down this year:
Source: UTX 4Q 2019 Earnings
Meanwhile, previously the “old” Raytheon had anticipated solid growth of 6% to 8% for its business entering 2020:
Source: RTN Q4 2019 Earnings
Of course, the world has changed since these expectations were made with the outbreak of the coronavirus pandemic.
Still, we believe 6% growth over the intermediate term is possible, taking into consideration the past records of the merged companies, the generally upbeat guidance and a strong backlog paired against short-term demand uncertainty and the difficulty in generating growth with a much larger business.
Competitive Advantages & Recession Performance
During the last recession, United Technologies posted earnings-per-share of $4.90, $4.12, $4.74 and $5.49 during the 2008 through 2011 stretch. Meanwhile, Raytheon posted earnings-per-share of $3.95, $4.79, $5.28 and $5.65 during this same time period. Both companies kept increasing their dividend payments throughout the Great Recession as well.
The newly merged company enjoys strong business segments in recession resilient businesses like defense and aerospace, where there is a good deal of contractual work. Furthermore, the company has a tremendous backlog that should support the business in an economic downturn.
Recently Raytheon Technologies CEO Greg Hayes said that while the current slowdown in commercial aerospace may be a two-year problem, he also noted that the company had $7 billion of cash on hand, $5 billion in financing and a $70 billion backlog.
Therefore, while Raytheon Technologies should be expected to show declines in revenue and EPS during a recession due to its exposure to the global economy, the company should also remain profitable, and will hopefully continue to increase its dividend even in a recession.
Valuation & Expected Returns
We are forecasting $4.16 in earnings-per-share in fiscal 2020 for the “new” Raytheon Technologies, based on $70 billion in sales, a 9% profit margin and an increased share count related to the merger.
With a 6% expected growth rate, this implies the potential for $5.57 in earnings-per-share for fiscal 2025, keeping in mind that this is one baseline possibility out of a wide array of potential outcomes.
If shares were to trade at 16 times earnings at this time, which is more or less in line with UTX’s 10-year average, this would imply a 2025 future fair value price of ~$89.
While a dividend has not yet been declared for the new company, if we suppose a 40% dividend payout ratio this would imply a $1.66 starting dividend. Over a period of five years, with the same 6% anticipated growth rate, you might expect to collect just over $9 in cash payments. Put together, that works out to ~$98 in anticipated value in half a decade.
Whether that appears attractive depends on the current share price. With a recent price near $62, this would imply the potential for 9.6% annual returns, as a starting baseline, over the next five years. Certainly, this could be too optimistic if short-term concerns turn into long-term headwinds, but presently RTX shares appear moderately attractive.
The merger of Raytheon and half of United Technologies put together two storied businesses. There is uncertainty related to how the companies will work together, along with the ongoing global pandemic.
However, we are encouraged by the strong records in operating history, earnings and dividend growth, the resiliency of the businesses in lesser times and the tremendous backlog.
Moreover, shares appear reasonably valued today, offering an opportunity to own a solid collection of businesses and have a fair shot at capturing strong results to come.