Here Are 20 Billion Reasons Not to Sell Sikorsky

But let's start off with just the first 3.5 billion.

Feb 21, 2014 at 8:35PM

File
Turkey plans to upgrade its air forces with more modern versions of this S-70 Seahawk -- already in Turkish service. Photo: Wikimedia Commons

Earlier this month, I laid out three good reasons why industrial conglomerate United Technologies (NYSE:UTX) might want to sell its Sikorsky helicopter division --- and four better reasons not to. On Friday, the list of arguments against selling Sikorsky just got longer -- 20 billion reasons longer.

As reported on DefenseNews.com Friday, Turkish Prime Minister Recep Tayyip Erdogan has just announced the conclusion of an agreement to hire Sikorsky to build his country 109 helicopters for an initial $3.5 billion. The helos in question will be a variant of Sikorsky's successful S-70 Black Hawk International platform, specially tweaked for Turkish needs, and designated the "T-70." Upon delivery, they will be parceled out to multiple Turkish government departments -- primarily the Turkish military, certainly, but some of the helos will also go to Turkish police forces, and even to the national Firefighting Department.

What does it mean to you?
Sikorsky's been waiting to get this contract finalized since at least 2011, when Turkey said it was all but ready to conclude the deal -- but had seen it stalled by "US corporate and other bureaucracy." Now that it's going through, though, what does it mean to Sikorsky, and to United Technologies shareholders?

At a minimum, this 10-year production deal looks likely to add $350 million to Sikorsky's annual revenue streams, instantly transforming the UTC division from a $6.25 billion business into a $6.6 billion business.

Conceivably, it could do even more than that. As DefenseNews reports, the contract with Turkey contains "options" that could see Turkey sextuple the size of the deal over time -- from 109 helicopters to more than 600. If that happens, the deal's size could balloon to $20 billion or more.

At current operating profit margins, this could mean as much as $1.9 billion in pre-tax profits for Sikorsky and for United Technologies over the life of the deal. Alternatively, United Technologies may decide to monetize its subsidiary immediately. At the valuation of 1x sales common for pure-play defense contractors, victory in the Turkish contract means United Tech can probably expect to sell Sikorsky to an interested buyer for at least $350 million more today than it could have gotten before the contract was announced. That's a very nice potential profit for United Technologies.

Best of all -- United Technologies wouldn't have to go to the trouble of building a single helicopter to earn it.

Oh, and one more thing
In addition to the potential payoff, did I mention that United Technologies already pays its shareholders a 2.1% dividend yield? Mustn't forget that bit -- because, over time, generous dividend-paying stocks like UTC can make you rich. While they don't garner the notability of high-flying tech stocks, dividend-paying stocks are also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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