The real-money Inflation-Protected Income Growth portfolio owns shares of United Technologies (RTX 1.52%). United Technologies, like every company in that portfolio, earned its place because at the time it was purchased:
- Its shares appeared to be reasonably priced.
- Its balance sheet looked solid.
- It had a covered dividend with a history of increases.
- That dividend looked capable of continuing to rise.
- The company fit reasonably well within the portfolio from a diversification perspective.
Still, just because a company fit a portfolio at one time doesn't mean it will fit forever. This article reviews the current state of several of the key factors that made United Technologies worth owning to determine whether it still has what it takes to retain its spot in the IPIG portfolio.
Based on a discounted cash flow analysis, United Technologies' business looks to be worth around $98.8 billion. Its stock recently closed at a price that gave the company a market capitalization of $101.5 billion. The two are close enough to say that United Technologies looks reasonably priced. Still, any fair value estimate is based on projections of an unknown future, and nobody has the ability to predict it exactly correctly.
Result: Hold, based on valuation.
United Technologies has a solid balance sheet, with a debt-to-equity ratio of around 0.7. That reasonable debt-to-equity ratio gives the company the flexibility to manage through financial turmoil and economic cycles while remaining strong. In addition, the company has more than $4 billion in cash on its balance sheet, which positions it well for servicing its existing debt while continuing to reward shareholders.
Result: Hold, based on balance sheet.
United Technologies recently increased its dividend to $0.59 per share per quarter, continuing its string of increasing that payment every five quarters. Dividend growth is an important characteristic that the IPIG portfolio actively seeks, and United Technologies has a nice track record of increases.
In addition, United Technologies' dividend remains well covered, with a 37% payout ratio. That payout ratio means that the company retains 63% of earnings to invest in future growth, while directly rewarding its shareholders with cash for the risks they take by investing.
Result: Hold, based on dividends.
All told: a company still worth owning
Looking at its valuation, its balance sheet, and its dividend, United Technologies still maintains the essential qualities needed to retain its place in the Inflation-Protected Income Growth portfolio. That may change over time, though, depending on the company, its competition, regulatory shifts, the whims of the market, and changes in its operating environment that reduce its ability to thrive. As a result, the company will again be reviewed in the future to make sure it still deserves a spot in the portfolio.