United Technologies: Aerospace giant faces headwinds

The aerospace and building systems manufacturer United Technologies is running into turbulence.

The maker of Pratt & Whitney plane engines, Otis elevators, and Carrier air conditioners has outperformed the broad stock market for much of the past decade, thanks in part to its business and geographic diversification.

But United Technologies, which recently completed a deal to buy aircraft-component maker Goodrich, is running into a bit of turbulence.

Slowing sales in China and the possibility of defense cuts at home, for instance, threaten UTX's enviable profit growth.

Related: Defense cuts won't hurt that much

Is this just a bumpy stretch or the start of a gradual descent?

Troubles abroad

Nearly half of the company's sales come from slowing Europe and Asia.

United Technologies (UTX, Fortune 500) international reach — 61% of its sales are generated overseas, with about a third of that coming from emerging markets like China and India — has long been seen as a positive. Now that global growth has hit a speed bump, though, this plus has turned into a minus.

The European debt crisis is casting a cloud over foreign sales (Europe accounts for 26% of revenue), and the strengthening of the U.S. dollar has made American goods less competitive abroad.

Related: Yum Brand's great growth overseas: Not over yet

In China, Otis was already losing market share to Finnish competitor Kone. "Otis raised prices last year in response to the rising cost of metal in China, leading to order declines," says Cai von Rumohr, managing director at Cowen. Companywide, UTX's Chinese sales were down 15% last year.

Taking a Flier on Flight

United Technologies is banking on aerospace at a risky time.

The purchase of Goodrich poses a risk. The $16.5 billion deal increased UTX's already sizable exposure to aerospace from 42% to 52% just as defense spending is under pressure (automatic cuts, in fact, begin in January unless Congress can agree on how to slash the federal budget). Uncle Sam accounts for 17% of the firm's sales.

Fortunately, defense makes up only a third of Goodrich's business — the rest comes from commercial contracts, says Morningstar analyst Daniel Holland.

"Since orders for aircraft components in emerging markets are expected to increase and demand for fuel-efficient aircraft is on the rise, the commercial side of the industry is still a relatively safe bet," he says.

Reason to be patient

The stock's dividend growth lets you ride out short-term pain.

Analysts are confident the firm's global strategy will pay off in the long run. The rise of the middle class in the developing world will keep driving the build-out of homes, offices, and power plants there, fueling demand for elevators and heating, ventilation, and air-conditioning systems.

Meanwhile, the stock — with a market-average price/earnings ratio of 13 — is paying you a market-beating 2.9% yield.

The dividend, raised for 18 consecutive years, is also growing faster than that of many of its industry peers. Its five-year annual dividend growth is 12.6%, beating competitor Northrop Grumman's (NOC, Fortune 500) 8.9% and Boeing's (BA, Fortune 500) 5.8%.

"It's possible the company might raise its dividends by a little less this year," says Brian Langenberg, principal at Langenberg & Co. "But long-term investors can expect the usual yearly increase for some time to come."

SOURCES: Bloomberg, Edward Jones, company filings