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United Technologies Corporation (UTX): 10%+ Annual Total Return Potential…If Management Can Execute

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United Technologies Corporation (NYSE: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.

UTX Dividend

According to Insider Monkey data, United Technologies Corporation registered a decline among smart money investors between July and September. A total of 48 funds tracked by Insider Monkey held shares of the company at the end of September, having amassed 3.50% of the company’s outstanding stock, versus 57 funds a quarter earlier. Ken Fisher’s Fisher Asset Management and Robert Rodriguez and Steven Romick’s First Pacific Advisors are among the company’s top shareholders with stakes containing 8.18 million shares and 5.73 million shares, respectively.

Like many other large cap companies (e.g. General Electric Company (NYSE:GE), Procter & Gamble Co (NYSE:PG), International Business Machines Corp. (NYSE: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 Co (NYSE:BA)) 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.

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