Friday, October 10, 2008
In one of the worst weeks in US stock markets history, there was a positive event that occured that suggests that what we saw this week may have been more about fear than about a collapse in underlying business prospects. That important positive event was United Technologies (UTX) dividend hike of just over 20%. A dividend hike in bad times is always a good signal as to how a company's board of directors view the future. UTX's board could have raised the dividend even as little as 7%, and it would have been good news, but raising it 20% causes one to pause a little longer and think about what this big dividend hike might mean. First it is important to note that UTX has raised its dividend an average of nearly 18% per year over the last 5 years. During this time their earnings growth has averaged nearly 15%. In the last twelve months, UTX's earnings have grown 16%. So, the 20% hike was not statistically out of their recent patterns. What is surprising is that the dividend hike is at the high end of their recent range and comes at a time when their stock is under heavy selling pressure. Indeed, UTX's price is down almost 38% in the past twelve months. Was the dividend hike an attention getter to buy back some of the sellers? That's silly. In recent months, dividends have been the last thing on people's minds. UTX would also not seem to be a company that would be slipping through the weakening economy without some bruises. The construction business is important to their Carrier division; the strength of the global economy is important to their Otis Elevator division; and they have tough competition in their Pratt and Whitney and Sikorsky Helicopter divisions. The conclusion I come to is that UTX's business is on balance good. Their geographic diversification of 48% North American sales and 52% global sales is serving them well. Innovations across all their product lines are being well received, and in a world that is increasingly interested in more efficient products, UTX is delivering. This means that UTX's new products are replacing existing installations early because of cost saves. In addition UTX has developed a low-heat geothermal product that is gaining wide acceptance all over the world. I can speak a thousand words or just a few about the week's market's collapse, and one dividend hike pales in comparison to the wealth that was lost this week. However, if the lost wealth this week was about a collapse in business prospects, I believe it would have been reflected in the amount of UTX's dividend hike. Since UTX hiked their dividend at the high end of their recent history and because of their size and influence in our economy, it is a signal to me that business is not falling apart, as the market would have us believe. Indeed UTX's dividend action would suggest that business prospects are still good on a global basis. This was also born out in IBM's spectacular earnings report this weak. The G-7 is meeting this weekend to try to find a way to restore order to the banking system and the markets. With the crushing the markets took this week, investor expectations are not high that a workable approach will result from the talks. I am praying that the market is wrong. I invite you to pray in whatever way is your custom for the men and women who will try to find solutions to the problems of our banking system. Here is mine. Oh Lord, you are the giver of all good things. Your Word says that You bring rains in the proper seasons that provide bounty to the land and food to the cattle and sheep of a thousand hills. Lord a deep fear-driven drought has come to the the financial markets of the world. We ask Lord that You would bring life giving rain in the form of wisdom and truth to our world leaders. Guide them to good policies that are pleasing to you and that will bear fruit. Grant us the courage and the wisdom to do endure these times of uncertainty. Grant us relief from this hour of uncertainty and replace it with the joy that is yours alone to give and you delight in giving. Amen.