Published by Bob Ciura on June 22nd, 2017
Surprisingly, several members of the Dividend Aristocrats—stocks in the S&P 500 Index with 25+ consecutive years of dividend increases—come from the industrial sector.
In fact, of the 51 Dividend Aristocrats, nine are industrials, such as 3M (MMM), Emerson Electric (EMR), and more.
This could come as a surprise, since industrials are very economically-sensitive. When the economy goes into recession, these stocks should be among the hardest-hit.
And yet, many continued to raise their dividends during the Great Recession.
United Technologies (UTX) is no exception.
While it is not a Dividend Aristocrat, it is a Dividend Achiever, a group of stocks with 10+ years of consecutive dividend growth.
United Technologies has paid uninterrupted dividends since 1936. And, it recently raised its dividend by 6%.
This article will discuss why United Technologies is a blue-chip dividend stock.
United Technologies is a global industrial giant. It generates $57 billion in annual revenue. The stock has a market capitalization of $97.55 billion.
The company operates four segments:
- Otis (20% of total revenue)
- Climate, Controls, & Security (29% of total revenue)
- Pratt & Whitney (26% of total revenue)
- Aerospace Systems (25% of total revenue)
Each business segment generates more than $10 billion in annual revenue.
2016 was another year of growth for the company.
Revenue and diluted earnings-per-share increased 2% and 4.9%, respectively, for the year.
This was a strong performance, in a year marked by global uncertainty. 2016 was the year of Brexit, the U.S. elections, and slowing economic growth in key emerging markets such as China.
These factors have elevated global economic risks, and yet, United Technologies continues to post steady growth.
It has many growth catalysts to look forward to over the next several years.
United Technologies expects positive growth across all of its major business segments through 2020, led by the Pratt & Whitney segment.
Source: Deutsche Bank Global Industrials Summit, page 9
Pratt & Whitney is expected to grow at a 10% compound annual rate through the end of the decade. This is arguably United Technologies’ strongest growth catalyst moving forward.
Strong demand in the commercial aftermarket is expected to propel Pratt & Whitney for the next three years.
United Technologies expects high single-digit organic growth for the segment in 2017, with accelerating growth thereafter. Increased execution for military programs such as the F-22 Raptor, F-35, and B-21 Raider, is expected to be a lasting tailwind.
Separately, aerospace is another growth catalyst for United Technologies.
In 2016, the aerospace segment simultaneously grew revenue, and expanded profit margins.
Segment revenue increased 2.6% for the year, while segment profit margin expanded by 250 basis points.
Source: Deutsche Bank Global Industrials Summit, page 19
Through 2020, United Technologies expects aerospace revenue and operating profit will increase 5%-7%, and 7%-9% each year, respectively.
There is a massive long-term growth opportunity for United Technologies in aerospace, particularly in the commercial market.
According to United Technologies, there are currently 27,000 aircraft in service. By 2030, there are expected to be 47,000 aircraft in service.
This growth will allow United Technologies to benefit from growing demand for jet engines.
The company is off to a good start to 2017. First-quarter revenue and adjusted earnings-per-share rose 3% and 1%, respectively.
For 2017, United Technologies expects overall organic sales growth of 2%-4%. This should be more than enough growth to continue raising the dividend for many years.
Competitive Advantages & Recession Performance
United Technologies benefits from several competitive advantages, including its intellectual property, and global scale.
The company has an extensive patent portfolio and intellectual property, thanks to significant investments in research and development:
- 2012 R&D expense of $3.5 billion
- 2013 R&D expense of $4.1 billion
- 2014 R&D expense of $4.5 billion
- 2015 R&D expense of $3.9 billion
- 2016 R&D expense of $3.7 billion
Such a high level of R&D spending allows United Technologies the innovation to come up with new products.
For example, the company’s Climate, Controls & Security business launched 132 new products in 2016, that are expected to generate organic sales growth.
United Technologies generates high profit margins and steady earnings, even when the company enters recession. Its performance during the Great Recession is as follows:
- 2007 earnings-per-share of $4.27
- 2008 earnings-per-share of $4.90
- 2009 earnings-per-share of $4.12
- 2010 earnings-per-share of $4.74
The company’s earnings fell in 2009, but quickly recovered. By 2010, earnings-per-share had exceeded the pre-recession level of 2007.
United Technologies performed well during the recession, particularly since it is an industrial company, which is traditionally an economically-sensitive industry.
Valuation & Expected Total Returns
United Technologies stock trades for a reasonable price-to-earnings ratio of 19. This represents a discount to the broader market average.
The S&P 500 Index trades for a price-to-earnings ratio of 26, on average.
It is fair to expect United Technologies to trade for at least a market multiple, given its status as a high-quality, blue-chip company.
As a result, the stock appears to be undervalued.
In addition to a higher valuation multiple, investor returns will be generated from earnings growth and dividends.
A potential breakdown of United Technologies’ expected total returns is as follows:
- 4%-6% organic revenue growth
- 1% margin expansion
- 1% share repurchases
- 2.3% dividend yield
Under this scenario, total returns are expected in a range of approximately 8%-10% per year, going forward.
Dividends are an important piece of total returns.
Source: Investor Relations
United Technologies has a forward dividend payout of $2.80 per share, good for a 2.3% yield.
The company recently raised its dividend by 6%. It can raise its dividend, because of its strong business model, which generates lots of cash.
United Technologies generated free cash flow of $4.7 billion in 2016, and utilized $2 billion for dividends, along with another $2.2 billion for share repurchases.
And, it has a strong balance sheet, with $7.1 billion in cash, and a debt-to-capitalization ratio under 50%.
United Technologies is a stalwart among blue-chip dividend stocks.
It has paid steady dividends for eight decades, and has raised its dividend each year for more than 10 years.
The company has done this through innovation, and a commitment to rewarding shareholders.
The stock appears to be undervalued based on its current valuation. And, United Technologies is an attractive stock for income, and dividend growth.