What happened
Shares of Raytheon Technologies (RTX 1.63%) were down 34.6% in the first half of 2020. Given the weakness in commercial aerospace due to the COVID-19 pandemic, some amount of pressure is to be expected. But the drop could have been much worse if not for a major deal the company completed earlier this year to diversify its revenue stream.
So what
Raytheon Technologies was formed in April when defense contractor Raytheon combined with the aerospace unit of United Technologies, the first defense megamerger in a generation.
The deal closed at a challenging moment for the United Technologies side of the business. That unit, which makes aircraft engines and interiors, gets most of its revenue from commercial sales, and not defense sales. But with the pandemic wiping out demand for air travel, airlines are grounding planes and looking to cut costs, eating into commercial aerospace revenue.
Image source: Raytheon Technologies.
Given the issues on the commercial side, United Technologies shareholders should be glad to have Raytheon's defense-focused business on board. The new Raytheon Technologies has said it expects to continue to pay its meaty dividend, which currently offers a 3% yield, in part thanks to the cash flow generated from the defense arm.
It should be noted that due to the merger accounting, some data services show Raytheon Technologies down more than 58% for the year. UTX was the buyer in the deal, and on some data services the new company inherited United Technologies' historical price data. But prior to the merger, United Technologies shareholders got shares in two new independent companies: Carrier Global and Otis Worldwide. That reduced the overnight UTX share price because some of the value went into two new stocks.
Factor in the performance of those shares (Carrier is up 92% since the split and shares of Otis are up 25%), and the overall return for legacy United Technologies investors who held their shares looks a lot better.
Now what
It's a difficult moment to try to get a feel for Raytheon Technologies. The company's commercial business could be affected for years by the pandemic and the economic aftershocks it causes, but the defense business is solid and growing. For long-term holders, there is a lot to like about both sides of the company, assuming you believe air travel will eventually rebound.
As a defense stock, Raytheon Tech's commercial business is likely to be a weight for the foreseeable future, and there are better Pentagon-focused companies to buy. But as a commercial aerospace stock, that defense business is a pretty powerful lifeline that makes Raytheon Technologies a better choice than many of its rivals for investors willing to ride out the storm.
