A Consistent Conglomerate

02/07/2008 12:00 am EST

Focus:

Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of the DRIP Investor, says United Technologies is a diversified, well-managed company that has posted strong results every year.

Quality companies that put up consistent results over the long term are tailor-made for dividend-reinvestment plans (DRIPs). One such company that should appeal to virtually any DRIP investor is United Technologies (NYSE: UTX).

The company operates in a variety of industries, including aerospace, defense, and air-conditioning products. The firm has been successful in making this diversified operating base work. Per-share profits have risen annually since 1999, and record results are expected this year. A strong global reach, healthy finances, and a history of dividend increases round out the appeal. The stock has held up reasonably well in recent weeks and offers an excellent choice for DRIP investors.

United Technologies operates in six business segments. Its Pratt & Whitney unit makes and services aircraft engines. The Carrier unit makes heating, ventilating, and air-conditioning equipment. Its Otis division manufactures elevators. Its Sikorsky unit makes helicopters. The company’s Hamilton Sundstrand operation produces electronic controls. And its UTC F&S division provides security and fire-protection services.

While the slowdown in the US construction markets will impact some of these units, the continued strength in global economies will help. United Technologies generates some 50% of its revenues from overseas, so this global exposure should help offset weakness in US markets.

Furthermore, the breadth of its operations helps diversify its revenue streams. Per-share profits are expected to come in around $4.85 per share in 2008, up from an expected $4.26 per share in 2007. Per-share profits should benefit from a continued widening in net profit margins as well as additional stock repurchases. The nearly 14% earnings growth expected in 2008 should be well above the earnings growth posted by the typical stock in 2008.

Based on 2008 earnings estimates, the stock trades for less than 15x [estimated 2008] earnings. (It closed below $72 Wednesday—Editor.) That is a very reasonable price/earnings ratio for a company with such a strong pedigree and long-term growth potential. The dividend was recently increased more than 20% to a quarterly rate of 32 cents per share. The current yield is 1.7%. Another dividend increase is likely in 2008.

United Technologies stock has posted a higher high every year but one since 1996, and I expect that streak to continue in 2008. The stock offers the type of size, consistency, and stability that should be highly prized during the type of volatile market I foresee for 2008. Investors should note that United Technologies offers a direct-purchase plan whereby any investor may buy the first share and every subsequent share directly from the company.

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