High Quality Dividend Growth With United Technologies

United Technologies (UTX) is a diversified industrial business with a strong presence in the aerospace and building systems markets. While this blue chip dividend stock has numerous well-known brands and entrenched market positions dating back more than 80 years, it seems to have lost its way a bit in recent years.

Like many other large cap companies (e.g. GE, Procter & Gamble (PG), IBM), UTX is facing growth challenges as some of its businesses have become very large, perhaps a little less focused, and more difficult to manage.

Generating tons of cash flow isn’t the problem – it’s whether or not the company should be viewed as an industrial “chugger” with strong long-term earnings growth potential or a mature cash cow that has already seen its best earnings growth days.

With the stock trading at about 14.5x forward earnings, the market seems to be voting that UTX is now a mature cash cow with limited earnings growth prospects.

A new CEO is trying to resuscitate profitable growth, but several controllable blunders and a handful of macro headwinds have complicated the company’s progress over the last year or so, making it difficult to get to the bottom of UTX’s challenges.

The company’s dividend yield (2.7%) and dividend growth look increasingly attractive, but income investors should remember that dividends are only part of the total return equation.

In this piece, we will take a closer look at UTX’s competitive advantages, dividend growth potential, and the key risks the company must overcome to get back on track for long-term growth.

We already own and like several other dividend stocks (e.g. GE, Boeing) that are similar to UTX in our Top 20 Dividend Stocks portfolio, but we see plenty of reasons to keep our eye on this one, too.

Business Overview

UTX provides a broad range of products and services to the global aerospace and building systems industries. Some of its key franchises are Otis (elevators), Carrier (air conditioning and refrigeration), and Pratt & Whitney (aircraft engines).

By end market, commercial and industrial markets drive about 52% of UTX’s sales, commercial aerospace accounts for 35%, and military aerospace & space generate the remaining 13% of sales.

Approximately 44% of the company’s sales are from aftermarket products and services, with the remaining 56% attributed to original equipment manufacturing. While the company doesn’t disclose this information, we wouldn’t be surprised if its aftermarket business accounted for more than 70% of segment operating profits.

By geography, UTX generated 36% of its sales in the U.S., 29% in Europe, 21% in Asia (China 6%), and 14% in other countries.

Segments:

Climate, Controls & Security (29% of sales, 17% operating margin):sells fire safety, security, building automation, heating, ventilation, air conditioning, and refrigeration systems and services.

Pratt & Whitney (25% of sales): designs, manufactures, and services aircraft engines, auxiliary and ground power units, and small turbojet propulsion products. The company’s large commercial engines power more than 25% of the world’s mainline passenger fleet.

Aerospace Systems (24% of sales): nearly all aircraft today rely on systems and components from UTX’s aerospace division, including actuation and propeller systems, electric systems, interiors, landing systems, sensors, and more. It is one of the world’s largest suppliers of advanced aerospace and defense products for business, military, and international customers.

Otis (22% of sales, 20% operating margin): UTX is the world’s leading installer and maintainer of elevators, escalators, and moving walkways. The company introduced the world’s first safety elevator in 1853 and maintains over 1.8 million elevators, escalators, and moving walkways worldwide.

Business Analysis

Many of UTX’s businesses have been around for a very long time, highlighting their durability and the relatively slow pace of change that occurs in many of their markets. For example, Otis has existed for more than 160 years, and Pratt has operated for around 90 years.

Such longevity has helped UTX build a lucrative installed base of equipment, enjoy substantial economies of scale, and maintain deep familiarity with customers to fully entrench its products and services.

Not surprisingly, many of the company’s businesses enjoy top market shares as a result. Aerospace Systems (24% of sales) is number one in its marketplace; Otis (22% of sales) is number one and is so large that it moves the entire world’s population every four days on its equipment; Pratt is number two; and Climate Controls & Security (29% of sales) is number one in North American residential markets, fire products, and transport refrigeration and number two in commercial HVAC.

Print Friendly, PDF & Email

Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

Share This Post On

Submit a Comment

Your email address will not be published. Required fields are marked *