Sunday, November 2, 2014

United Technologies or Honeywell: Which is the Better Stock to Buy?

When long-term investors compare the investment case for industrial conglomerates such as United Technologies Corporation (NYSE: UTX  ) and Honeywell International Inc. (NYSE: HON  ) , they often focus on a metric called return on equity, or ROE. In a nutshell, ROE measures the net income a company produces from shareholder equity.

Today I'm going to break down why ROE is such an important measure for valuation purposes and how it determines a company's ability to grow its dividend. Moreover, I'll carry out a DuPont analysis, a method of garnering more detail on why one company is outperforming another, so that readers can best decide what to do with their money.

Why return on equity matters
One of the simplest and most commonly used valuation methods for stocks is the Dividend Discount Method, also known as the Gordon Growth Model. Simply put, it's a way of valuing a stock based on the potential for future dividend growth. Don't be alarmed by the equations; it's simple stuff.


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