TransDigm Group Incorporated (TDG): A Good Company Is Not Necessarily a Good Investment

But this acquisition comes with a price as well, with United Technologies nearly doubling its gearing from 43% to 82%. Despite this increase in leverage, United Technologies Corporation (NYSE:UTX) still sports a decent dividend yield of 2.3%. Also, according to its first quarter fiscal 2013 earnings release, it has spent $335 million on share buybacks year-to-date, on track to meet its $1 billion target.

Conclusion

Borrowing to pay dividends is essentially a transfer of wealth from debt holders to equity holders in the short term, with shareholders bearing additional financial risk subsequently. I am negative on such actions. That is exactly what TransDigm Group Incorporated (NYSE:TDG) did in the first quarter of fiscal 2013, increasing its gearing from 295% to 631% to finance a special dividend of $12.85 per share. A company with a good business may not be an equally ideal investment candidate. High leverage and a valuation premium over peers will steer me clear from this stock.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends TransDigm Group.

The article A Good Company Is Not Necessarily a Good Investment originally appeared on Fool.com.

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