Monday, August 18, 2014

Dividend Growth Investment United Technologies Corporation

My most recent acquisition was United Technologies Corporation (UTX). I actually executed this transaction a while ago, so my cost base is a bit higher than what UTX is currently trading for. 

United Technologies Corporation is an almost 100 years company, that exists in its current form since 1975 as a diversified industrial conglomerate. This is exactly the kind of company that I appreciate, they have a competent and strong management team, a strong balance sheet, an impressive track record and operate in industries that I consider to be of high potential in the future.

Despite my interest in the company, I was being able to find better opportunities somewhere else cost-wise. However, UTX dropped dramatically upon reporting the latest quarterly results (which were good, by the way), and so I pulled the trigger at this opportunity.

United Technologies Corp has consecutively increased its dividend for 20 years and has a pretty high CAGR of 10-15%. I consider all of their industries to be aligned with strong megatrends - urbanization and increase in commercial aircraft passengers. Currently their business is organized in the following segments:



The green segment comprises the aerospace industry - Pratt & Whitney produces jet engines and aerospace systems produces systems and products to help operate planes (like cabin systems). The green segment is useful both in military aircrafts (defense sector) and commercial airplanes (commercial sector) and for me that makes it one of the biggest advantages. 

It came of quite a shock to me, but roughly 85% of the people in the world have never flown in an airplane before. As more and more people are uplifted from poverty into the middle class, and the cost of flying keeps dropping, I expect to see great sustainable growth in the demand for airplane engines and systems. What usually causes a strong drops in commercial flights is predictably armed conflict. However, that would probably result in an increase in demand for military investment, balancing the downtrend in commercial flights with increased demand in the defense sector.

The blue segment includes essentially building technologies. Otis is an elevator/escalator manufacturer, it probably does not need any introduction as they are pretty common in many buildings and airports. The climate, controls and security includes many other appliances that are required in any building: Heating, air conditioning, ventilation, fire alarms, security alarms and some innovations regarding efficient energy management in buildings.

These are the kind of technologies that are always needed in any building in the world, and more than that, all these appliances need maintenance, which the company can provide itself. Meaning each sale, actually secures a strong post-sales contract for the future.

From a financial perspective they are very strong, they have one of the strongest dividend cash-flow cover I have seen recently. Last year they had free cash flow of $5B and payed dividends of $1.9B. Since the management is so conservative, I don't expect this cash generation to translate into faster dividend growth, and I am fine with that. They recently acquired GoodRich and still have some outstanding debt, which they are aggressively paying down. This is the reason for the slight reduction in the dividend growth rate, but after the debt is payed, there will be a significant portion of surplus cash for both dividends, share buybacks and further acquisitions.

I am not fully happy with the dividend on cost I got which was 2%, but considering the company, I'm confident that this was a great acquisition to my portfolio, and coincidentally, it fits particularly well because I didn't have any company in the industrial sector yet.


Stock Price: 115$
Dividend Yield: 2%
Dividend Raise Streak: 20 Years
Typical Yearly Dividend Growth (5yr): 10%

The company is currently trading at around 105$ which I find to be a great cost and I will probably average down as soon as I have capital to deploy. What do you think of the industrial sector?

2 comments:

  1. UTX is an awesome company that was on my radar since I became a dividend focused investor about seven years ago. I just never pulled the trigger on it and wish I had. I am very heavy in industrial stocks and that might have influenced my thoughts not to buy into it. It's still on my mind and perhaps at a slightly better entry point I would initiate a position. To answer your question... I love industrial stocks, in fact industrial and consumer sector stocks account for about 40% of my portfolio. Thanks for sharing this analysis and recent buy of yours.

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    1. Hey DivHut,

      Great minds think alike! I also had UTX on my sights ever since I started. I am quite impressed with the track record, strength of the balance sheet and future prospects of the company.

      Looking forward to have you as a fellow shareholder should the price drop to your goal.

      Best,
      Dividend Venture

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