Many companies talk about how they enhance shareholder value by returning cash through dividends or stock buybacks. But investors shouldn't just take the company's word for it. In this series, we'll investigate how companies have spent free cash flow over the past five years. By doing so, we hope to gain insight into whether the company's management might be good stewards of shareholder capital.
Today, we'll take a look at industrial conglomerate United Technologies (NYSE: UTX).
How does it spend free cash?
First, let's have a look at how much free cash flow the company has generated in each of the past five years and how much has gone toward dividends and buybacks.
|
Metric |
2010 |
2009 |
2008 |
2007 |
2006 |
|---|---|---|---|---|---|
| Buybacks |
$2,200 |
$1,100 |
$3,160 |
$2,001 |
$2,068 |
| Dividends |
$1,482 |
$1,356 |
$1,210 |
$1,080 |
$951 |
| Total Paid |
$3,682 |
$2,456 |
$4,370 |
$3,081 |
$3,019 |
| Free Cash Flow |
$5,209 |
$4,419 |
$5,148 |
$3,397 |
$3,746 |
Source: Capital IQ, a division of Standard & Poor's, as of Aug. 26, 2011. Figures in millions.
United Technologies has a solid track record of paying dividends. It has paid a dividend each year since 1936, and the payout has grown at nearly 16% annualized in the past decade.
Despite this illustrious dividend history, buybacks seem to be management's preferred way of returning cash to shareholders, as United Technologies repurchased more than $10.5 billion of its stock versus $6.1 billion paid out in dividends between 2006 and 2010. A little later on, we'll see whether those repurchases were wise investments or not.
Is the dividend covered?
Next, let's see how much of the company's free cash flow has gone to dividends.
|
Metric |
2010 |
2009 |
2008 |
2007 |
2006 |
|---|---|---|---|---|---|
| FCF Payout Ratio |
28% |
31% |
24% |
32% |
25% |
Source: Capital IQ, a division of Standard & Poor's.
This is what you like to see: United Technologies covers its dividend more than three times with free cash flow. While this is encouraging news, the company must siphon some of this extra cash to fund its legacy defined benefit pension fund -- in each of the past two years, for example, it contributed $1.3 billion to its plan. The dividend still seems very sustainable, but not as much as it would be if there weren't pension funding needs.
Is it a good investor?
Companies are notoriously bad investors in their own stock. Consider that in 2007, when the market was hitting record highs, S&P 500 companies bought back a record $589 billion, versus $246 billion in cash dividends. In 2009, when the market was around its nadir, buybacks hit record lows.
Is United Technologies an exception?
Source: Capital IQ, a division of Standard & Poor's.
United Technologies' buyback record is mixed, but overall, positive. Though it smartly (in hindsight) bought back stock in late 2008 and early 2009, the company's more recent buyback trend seems to have followed its share price.
Competitors
How does United Technologies' use of free cash flow stack up against some of its major competitors over the past four quarters?
|
Company |
Free Cash Flow |
Share Buybacks |
Dividends |
|---|---|---|---|
| United Technologies | $5,084 | $2,550 | $1,519 |
| Honeywell (NYSE: HON) | $2,224 | $504 | $1,010 |
| Precision Castparts (NYSE: PCP) | $960 | $0 | $17 |
| Boeing (NYSE: BA) | ($554) | $0 | $1,236 |
Source: Capital IQ, a division of Standard & Poor's. All figures in millions, as based on trailing-12-month data.
Foolish bottom line
United Technologies is a well-entrenched company with solid competitive advantages that generates plenty of free cash flow to fund buybacks and dividends. Shares are down nearly 20% in the past month, and its current P/E of 13.7 times is well below its five-year average P/E of 15.9 times, making United Technologies a worthy name for your watchlist.
