Earnings Time

Earnings time is always exciting, this is when we get the see how our companies have performed over the past 3 months and get a sense for where they are headed for the next 3 months.  I’m looking at United Technologies today (UTX) today as they reported before the market open today.  If you aren’t familiar with the company they are a diversified industrial in the aerospace, defense and building industries.  Some of their product lines are Otis Elevators, Pratt & Whitney Engines, Carrier HVAC equipment.  Visit their site for more information.

At a glance (from seekingalpha):

United Technologies (NYSE:UTX): Q3 EPS of $1.76 beats by $0.10.

Revenue of $14.35B (+4.1% Y/Y) beats by $80M.

They beat on both the top and bottom lines, nice!

So looking to FAST Graphs, this company has been a steady eddy over the years as well as a market beater over the long run.  This first image shows their historical performance back to the start of 2003.  A few highlights from this, growth was higher during the early periods but the past few years have still seen high single digit earnings growth.  This is good, earnings is what will ultimately drive dividend increases and stock price increases.  Additionally, your personal yield on cost (dividends received divided by your investment) would have grown from a starting 1.8% to 8.3%.  This is compounding at it’s finest!

Dividend Machine

Since we are trying to build our own compounding machine, companies like this have fit the bill.  This is why we shouldn’t be worried even with a slightly higher starting yield today, because the compounding effect has caused the stock price to rise in correlation with the earnings growth and subsequent dividend growth.  By the way, UTX currently has a 23 year dividend growth history, 2 years short of becoming a dividend champion.

utx_returns

utx_10252016

FAST Graphs

We can see visually in this second graph the fact that the company has been a steady grower over time.  Earnings are represented by the orange line.  The blue line represents the average multiple (PE ratio) the market has paid for said earnings.  What we like to see is a steady upward trajectory of the orange line.  The black line is the month end stock price and you can see it meander around the blue line.  Generally speaking, when it’s above the blue line the stock is overpriced, under it is undervalued.  The distance at any given time from the blue line represents the premium or discount the market is paying for the company’s earnings.

The Great Recession is but a small blip in their earnings growth history (time period highlighted in gray).  After having taken a step back in earnings last year, full year 2016 and 2017 look to return to their steady growth ways.  The stock still looks appealing today, trading at about 15x earnings which is very slightly undervalued based on the companies own historical performance.  It’s also trading right at about the market’s as a whole historical multiple.

Cash Flow Statement

Finally I want to just highlight a couple data points from the cash flow statement.  The purple bars represent free cash flow which is the ultimate indicator of a successful company.  This is the actual cash leftover for a company to spend after everything is said and done.  It can be used for dividends, share repurchases, paying down debt or growing the company.  The blue-ish looking bar represents the dividends per share paid out by UTX over the years.  A measure of dividend safety is to verify that the blue bar is lower than the purple and also the sheer percent of cash flow it takes up.  That figure can give us a general guideline of how quick the dividend may grow in the future.

utx_cash_flowIn terms of cash flow, the dividend took up about 23% of in 2000.  At year ending 2015 (which saw an earnings decline), the dividend represented 51%.  So the free cash payout ratio has increased over the years though it is still a very safe dividend.  By comparison, 2014 was a better year in terms of generating cash and the dividend was still under 40%.  We’ll have to see what the year end free cash flow numbers look like.

In conclusion, United Technologies reported another good quarter and they are on pace for a solid 2016.  The company has been a steady performer and has rewarded shareholders greatly over the years, including market beating total returns.  Even at today’s price it looks attractively priced for starting or adding to a position.

Let me know your thoughts in the comments.

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