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

So far, we have had two of the three companies declare dividends.

Raytheon Technologies 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 declared a quarterly dividend of 20 cents/share. This amount seems in line with the cost basis allocation. Since this company was just spun-off however, I view it as a standalone company with a standalone dividend record that was just established. I am not going to add to the stock, but will hold it.

I expected that Carrier will declare their quarterly dividend by now, but they are deferring that decision, due to the challenging macroeconomic environment. This decision seems 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 will hold this position for the time being, and evaluate again by end of 2020. Or 2021.  I will not be adding to the stock, but would evaluate it in the future.

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