“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.
UNITED TECHNOLOGIES CORP. $127(New York symbol UTX; Manufacturing & Industry Sector; Shares outstanding: 862.8 million; Market cap: $109.6 billion; Dividend yield: 2.3%; Takeover Target Rating: Low; www.utc.com) has four main divisions: Pratt & Whitney manufactures aircraft engines (29% of 2018 revenue, 14% of earnings); Carrier makes heating and air-conditioning equipment under the Carrier brand, as well as burglar alarms and fire-safety products (28%, 40%); Collins Aerospace Systems manufactures aircraft controls (24%, 25%); and Otis makes elevators and escalators (19%, 21%).
United Technologies’ overall revenue fell 3.1%, from $57.9 billion in 2014 to $56.1 billion in 2015 on the sale of its Sikorsky helicopter business to Lockheed Martin for $9 billion. Revenue then rose to $57.2 billion in 2016, and increased to $59.8 billion in 2017.
Following the Sikorsky sale, earnings fell from $6.65 a share (or a total of $6.1 billion) in 2014 to $4.53 a share (or $4.0 billion) in 2015. Earnings improved to $6.13 a share (or $5.1 billion) in 2016, but fell to $5.70 a share (or $4.6 billion) in 2017 due to charges related to the new U.S. tax rules.
In November 2018, the company acquired Rockwell Collins Inc. (New York symbol COL) for $30 billion in cash and stock. Rockwell makes aircraft components such as cabin interiors, computerized flight controls and air-to-ground communications equipment.
As a result of that purchase, United Technologies’ revenue in 2018 rose 11.1% to $66.5 billion. Earnings improved to $6.50 a share (or $5.3 billion). If you exclude unusual items, earnings per share gained 14.4%, to $7.61.
In the quarter ended June 30, 2019, the company’s revenue jumped 17.5%, to $19.6 billion from $16.7 billion a year earlier. If you exclude currency rates and Rockwell’s contribution, sales gained 6%. Earnings rose 20.4%, to $1.90 billion from $1.58 billion. Due to more shares outstanding, earnings per share rose 11.7%, to $2.20 from $1.97.
United Technologies has now agreed to merge with Raytheon Co. (New York symbol RTN), a leading maker of electronic systems for military aircraft and radar systems. It’s also the world largest maker of guided missiles.
Raytheon shareholders will receive 2.3348 shares in the combined company—called Raytheon Technologies Corp.—and own 43% of the new firm. United Technologies shareholders will get one share in the new firm for each share held and own the remaining 57%.
Eliminating overlapping operations, along with savings from the Rockwell acquisition, should cut $1 billion from Raytheon Technologies’ annual costs by the end of the fourth year. As a bigger firm, it should also be better able to compete for new defence contracts.
The two companies expect to complete the merger in the first half of 2020. Meantime, United Technologies still plans to spin off its Otis and Carrier operations as separate companies. It has yet to announce the details, but investors will only be liable for capital gains taxes when they sell their new shares.
The merged company expects its free cash flow (regular cash flow less capital expenditures) will rise from $6 billion in 2019 to $8 billion in 2020. That will help pay for its plan to spend $18 billion to $20 billion on dividends and share buybacks in the first three years.
United Technologies trades at 15.8 times its forecast 2019 earnings of $8.03 a share. The $2.94 dividend yields 2.3%. It’s likely that the new Raytheon Technologies will have a similar yield.
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