TAKING STOCK: Lower dividend yield but a better stock

Dear Mr. Berko:

I'm considering the purchase of 500 shares of TECO Energy because I'm attracted to its 5 percent payout and its potential growth in prosperous Florida. But my broker tells me that United Technologies, which pays only 2 percent, is a better buy for appreciation and dividend increases, and he thinks I should buy that instead. Which would you select for a conservative long-term investor?

-DK, Erie, Pa.

Dear DK:

I think your broker's advice deserves a gold star and a steak dinner at La Bonne Vie, my favorite Erie restaurant.

Before the Y2K problem, before the New York Stock Exchange became a sewer for Wall Street's detritus, before high-frequency trading, before the cloud, when stockbrokers were called "customer's men," TECO Energy (TE-$17.37) was called Tampa Electric. It traded in the high $20s, and its earnings and dividends were attractive; TE was a classy growth and income stock. Then management blundered, and its barge business foundered. Its oil and gas business went to pot. Earnings crashed. The dividend was slashed. Capital spending nosedived. On a downward spiral, TE stumbled below $10 share in 2002. This was a poorly managed company. Management needed an industrial-sized enema.

TE is a $3 billion-revenue electric and gas utility with 700,000 electric and 350,000 gas customers in vibrant, growing west central Florida, one of the fastest-recovering areas in the U.S. But TE is still a very poorly run utility. Management sold its money-losing barge/transportation business four years ago, offloaded its nonproductive Guatemalan generation business two years ago and may soon junk its spastic coal mining operations, which are burning in the red. During the past decade, revenues have trended lower, and earnings have been uncharacteristically volatile. The stock price has been a major disappointment. Projections for 2014 and 2015 are unattractive, and there's no likelihood of a dividend increase from the 88 cents TE has paid since 2011. Management still needs that enema!

Yes, TE's 88-cent dividend yields an attractive 5 percent, which is among the highest in the industry and a percentage point above the average for electric utilities. The dividend is safe, but considering past failures, I doubt current management is capable of growing the company. TE also needs a transfusion. However small, poorly run utilities are attractive candidates for larger utilities seeking to grow. Thirteen utility takeovers have been announced in the past dozen months, versus four utility takeovers for the previous dozen months. I suspect that a potential suitor would pay a 30 percent premium to the current market price, and this could happen in the next 15 months-maybe!

United Technologies (UTX-$106.17) is one of the 30 stocks that make up the Dow Jones industrial average. It's a Jim dandy diversified conglomerate with a strong cash flow and $62 billion in revenues, derived from five business segments: 1) Pratt & Whitney-$14.5 billion-designs, manufactures and services commercial and military aircraft engines. 2) Otis Elevator Co.-$12.5 billion-is the world's largest manufacturer of escalators and elevators. 3) UTC Building & Industrial Systems-$17 billion-includes Carrier, which manufactures heating and air conditioning systems. 4) Sikorsky-$6 billion-manufactures military and commercial helicopters. 5) UTC Aerospace Systems-$13.5 billion-produces aerospace and industrial products, including Goodrich, which was acquired in 2012. All five of those segments are humming well; revenues should grow by 5 to 6 percent this year. Net profit margins should improve from 8.9 percent to 9.2 percent. Wall Street expects share earnings to rise to $6.86 from $6.21, with a 12-month price target of $130 to $135. The consensus for 2015-16 is even better, and if you're a dividend diva, you'll be pleased with UTX's payout record, which has grown fourfold since 2003, from 57 cents to $2.36.

UTX's excellent management team believes that it can continue to grow revenues, increase free cash flow, improve operating margins, grow net profit margins and regularly raise the dividend payout. Apparently, Louis Chenevert, who was appointed chairman and CEO several years ago and owns 565,100 shares, agrees. It also seems that Vanguard, BlackRock, Wellington Management, State Street, BNY Mellon, T. Rowe Price and J.P. Morgan, which together own over 220 million shares, agree.

Buy 100 shares of UTX; it's a no-brainer.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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Published: Tue, Sep 30, 2014