Thursday, May 14, 2020

What should I do about Raytheon and its spin-offs?

Just a few weeks ago, United Technologies (UTX) spun-off OTIS Elevator (CARR) and Carrier Global (CARR) to its shareholders.

Each shareholder of United Technologies received one share of Carrier for each share of United Technologies that they held.

Shareholders received a share of Otis Elevator for every two shares of United Technologies.
Following this event, United Technologies completed its acquisition of Raytheon. As a result, it changed its name to Raytheon Technologies (RTX).

I usually hold on to shares received in a spin-off, although I generally do not add to these positions. I even hold on to shares in a spin-off that hasn't declared dividends yet. I am more likely to be patient, and let the spin-offs find their dividend balance.

Before the spin-offs, and the acquisition, shareholders of United Technologies received a quarterly dividend of 73.50 cents/share.

I owned shares of United Technologies is several of my accounts. I reviewed the shares that were spun-off, and the allocation of cost basis. It seemed that the cost basis was allocated in the following basis:

55.1705% allocated to Raytheon Technologies (RTX)
26.1402% allocated to Otis Elevator (OTIS)
18.6893% allocated to Carrier (CARR)

If I allocate the dividend with the same percentages, as the ones used to split the cost basis, I come up with the following dividend amounts:

Raytheon Technologies (RTX) – 40.55 cents
Otis Elevator (OTIS) – 19.20 cents
Carrier (CARR) – 13.74 cents

As of June 11th, we have all three companies declare dividends after the spin-offs and mergers.

Raytheon Technologies (RTX) has declared a quarterly dividend of 47.50 cents/share. This amount seems like a dividend hike to me. Therefore, I still view this company as a dividend aristocrat or a dividend champion, since it inherited the dividend history of United Technologies. It looks like Standard & Poor's is treating this new dividend payment as a dividend cut, which doesn't make sense. If they remove Raytheon from their list simply because it had two spin-offs, that would make their list less credible.

Otis Elevator (OTIS) declared a quarterly dividend of 20 cents/share. This amount does not seem in line with the cost basis allocation. That's because we received half a share of Otis for every United Technologies share we owned. To maintain dividend income, Otis should have declared a dividend of 40 cents/share. Therefore, this looks like an effective dividend cut. I would be watching to see what they will be doing from here.

Carrier declared its first dividend on June 11th, 2020. It would pay 8 cents/share. This is lower than what I expected. It also looks like an effective dividend cut to me as well.

I expected that Carrier will declare their quarterly dividend right away, but they deferred that decision, due to the challenging macroeconomic environment. This decision seemed like a dividend suspension to me, but I am somewhat lenient towards dividend declarations with spin-offs (at least I was in the case of Yum Brands and Yum China). I am glad they declared that dividend. I would be watching to see if they actually grow it from here.

Since these companies were just spun-off however, I view them as a standalone companies with a standalone dividend records that was just established. I am not going to add to any of these companies, but will hold.

I will not be adding to either stock, but would evaluate it in the future.

Overall, shareholders of United Technologies experienced a dividend cut.

They received 73.50 cents/share prior to the split.

Now they are receiving:

47.50 cents/share from Raytheon Technologies (RTX)

8 cents/share from Carrier (CARR)

20 cents/share from Otis (OTIS). This should be divided by two, since we received half a share of Otis for each share of United Technologies.

Overall, we are receiving 65.50 cents/share versus 73.50 cents/share.

I will not be selling, but will be taking the dividends in cash, and deploying them elsewhere. If any of these standalone companies end up cutting or suspending dividends from these levels, I will sell them.

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