Otis Worldwide: Stock and Dividend Analysis

Another quick portfolio update before I begin. I’m continuing to add to holdings in the Canadian apartment sector, increasing my position in Mainstreet Equity (TSX:MEQ). It’s now up to a hair over 1% of the portfolio.

As much as I like the generous dividends offered by Killam Apartment REIT (TSX:KMP.un) or the great discount between price and NAV from Morguard Residential (TSX:MRG.un), I can’t ignore Mainstreet’s combination of growth and value. We’re looking at a company that has the potential to grow by 15% annually for a while longer, yet the valuation is very reasonable at just 15× 2026’s projected FFO. That’s a nice combination.

I also think that Mainstreet will continue to grow its dividend at a double-digit pace for a very long time, which makes up for the anemic 0.2% yield. It also recently doubled its dividend

I won’t say much more about Mainstreet today. I’ll save my thoughts for a follow-up post on it. Look for that sometime next month.

Also, before we get to Otis Worldwide (NYSE:OTIS), a quick reminder that our interesting stock list will be sent to all premium subscribers on Friday. Some stocks I have my eye on for February include Kraft Heinz (NYSE:KHC) and Comcast (NASDAQ:CMCSA) on the U.S. side, while goeasy (TSX:GSY) continues to be interesting on the Canadian side. Like last month, I’ll narrow it down to 20 names, and there will likely be a few repeats.

Anyway, onto Otis Worldwide, an excellent company that’s trading for a reasonable price.

The skinny

Otis Worldwide is the world’s leading elevator and escalator manufacturer, installer, and servicer. It has a portfolio of 2.4M elevators and escalators spread around the world, which combine to move some 2.4B people each and every day.

The company was founded way back in 1853 by Elisha Otis after he invented a safety device that prevented elevators from falling if the hoisting cable breaks. This was a massive benefit to society, and it enabled the invention of the skyscraper shortly thereafter.

Interestingly, Otis’s contribution to elevators may actually pale in comparison to another safety device he invented. He came up with a railway safety brake in the 1840s.

The company slowly expanded over the next 150 years, adding escalators to its product line in the 1890s. It was eventually acquired by United Technologies (now RTX Corporation after it merged with Raytheon) in 1976, and then spun out of the conglomerate in 2020.

Otis is divided into two parts — installation and service. Installation is closely linked to the real estate market in cities, and has struggled a little bit as higher interest rates make large real estate projects less attractive. The worldwide bear market in office space hasn’t helped, either.

The service part is much more interesting. Elevators break down, parts need to be replaced, and governments require regular elevator servicing in the interest of public safety. There’s no avoiding it. And since Otis has been around for so long, it has a nice little backlog of equipment that needs servicing.

In fact, it’s actually the service part of the business that generates nearly all the profits. In 2024 the company generated $2.5B in operating profits. Service accounted for $2.2B of those profits, while new equipment only chipped in with a $329M contribution.

Let’s not kid ourselves here; this is mostly a service business, which means that a slowdown in construction isn’t as big of a deal as you’d first think.

Overall, the company has approximately 16% operating margins, a number that is propped up by the service part of the business and brought down by new installations. New installations featured a 6.1% operating margin in 2024 (down slightly from 6.6% posted in both 2023 and 2022), versus a 24.6% operating margin from the service part of the business.

We’ll also note that service margins have increased over the last few years, and there’s a certain amount of operating leverage in the service part of the business. The bigger Otis gets, the more efficient the service division will get. It benefits from scale.

Put it all together, and Otis has grown its bottom line steadily since 2019. The company generated $2.22 per share in normalized profits in 2019, its last year under its former parent. EPS is estimated to increase to $4.06 per share in 2025, and then increase again to $4.45 per share in 2026, and again to $4.93 per share in 2027. That works out to about 11% annual earnings growth between 2019 and 2025, and analysts predict growth will be about the same for the next few years.

And yet, despite pretty good results, shares have basically done nothing since 2022. The stock is just 12% higher in the last three years, despite growing earnings by 35% between 2021 and 2025.

As mentioned, one of the things impacting the stock today is a tepid real estate market. But it goes a little further than that. Investors are worried that the company has too much exposure to China, and that it has delivered such good results largely on the back of the Chinese property market.

We can see in recent results that China does have a considerable impact on the new construction part of the business. The new installation backlog fell by 1% in the quarter, but was up by 8% if we exclude China.

If you think the China story gets worse from here instead of better — as a lot of people already do — then I can see the logic of selling the stock.

On the plus side, the company recognizes that China is slowing down, and is making efforts to restructure the business there and save some costs. This should really help the bottom line in 2026. And the Chinese property market has been struggling for a few years now, so it’s not like this is a brand new phenomenon.

The backlog has also just been okay for the better part of two years now. Investors like seeing an increase in backlog orders, while Otis is mostly just treading water. It also looks like more buildings are looking to modernize, rather than replace, their elevator systems.

Another issue is that Otis is a worldwide company, but results are reported in USD. This has helped prop up results more recently as other currencies get stronger versus the U.S. Dollar. Favourable exchange rates added 2% to the top line in the company’s most recent quarter, and added about 3% to the bottom line. That’s about a third of all earnings growth in the quarter coming from exchange rate differences.

In other words, if we take out that positive contribution, earnings growth was just okay. It makes results look better than they actually are.

Mostly though, much of the weakness comes from multiple compression. We’ll talk more about that in the next section.

In the meantime, let’s look quickly at Otis’s balance sheet. The company owes net debt of just under $8B versus estimated 2025 EBITDA of around $2.5B. That gives us a debt-to-EBITDA ratio of a hair above 3x, which I’d consider high. But this is a highly predictable business, and so a bit of debt isn’t a huge problem. Service contracts are long-term in nature and have high renewal rates, which leads to a pretty predictable business. Those kinds of businesses can handle a little more debt. In addition, the company is returning excess free cash flow to investors, which also makes the debt more tolerable.

The opportunity

Otis is a quality company with decent growth potential that is trading for close to the lowest valuation since it became a publicly traded company back in 2020.

That’s the thesis in a sentence.

As interest rates plunged during the pandemic, real estate stocks around the globe rallied. Even office space (mostly) joined the party. Interest rates were low and looked to stay down for the next 5-10 years, with most every academic predicting we’d see a repeat of 2009’s sluggish growth after the Great Recession.

One consequence to this is stocks like Otis — which gets linked to real estate despite the service part of the business generating 80%+ of total profits — got bid up to what were pretty ridiculous valuations. Otis traded between 25 and 30x earnings for most of 2021.

And so, even as earnings have increased, valuations have come down. These days Otis shares trade hands for a hair over 20× 2026’s projected earnings. We’re at about 18× 2027’s estimated earnings, too. It’s a reasonable valuation.

But is it cheap?

From a dividend perspective it certainly is. Otis offers a 2.1% dividend yield, which was only surpassed in the chaos of the 2020 market.

The stock is also cheap versus at least one large competitor. Sort of. Schindler Holding trades on the Swiss exchange and currently goes for about 28× 2026’s earnings. But SCHP has a debt free balance sheet, which should factor into our analysis. Both companies trade for about 16x EV/EBITDA. Schindler also pays around a 2% dividend.

But I’m not sure that today’s price is truly an outstanding one. I’m a little bit like Buffett where I like paying under 15x earnings for what I feel is a good business. Price is important. It’s not the only factor, obviously, but it’s still something that factors into each investment decision I make. This is why Buffett did so well; the man was willing to sit on his hands for years before he made an investment decision. I want to incorporate more of that into my portfolio.

Saying that, I think it’s likely this one never makes it all the way down to 15x earnings. It’s just too high quality; investors will snatch up shares before it gets that cheap.

Buybacks and dividends

Otis has been a steady repurchaser of its own shares since 2021, eliminating approximately 32M shares from 2021-24. Shares outstanding fell from 433M to 401M.

We’ve seen more of the same in 2025. Otis has repurchased about 12M shares through the first three quarters of 2025, bringing shares outstanding down to about 389M.

Put it all together, and Otis has reduced shares outstanding by a hair over 10% since returning to the public markets in 2020. Not bad.

Let’s pivot over to the dividend, which has grown nicely in the short time Otis has been publicly traded. The dividend debuted at $0.60 per share on an annual basis. It increased by some 150% between 2020 and 2024, increasing to $1.51 per share.

These days, Otis pays a $0.42 per share quarterly dividend, or $1.68 per share annually. That works out to a 1.9% yield today, but analysts expect another double-digit dividend increase in May, when the company traditionally hikes the payout. So we get a forward yield in the 2.1% range — which isn’t bad combined with 10%+ dividend growth.

The payout ratio is in the 30-40% range too, which bodes well for future dividend growth.

Dividend safety: High
Dividend growth potential: 8-12%

The bottom line

Let’s summarize the bull and bear points, starting with the bull argument.

• Otis is largely a service business, which generates sticky revenue and steady profits

• It clearly has pricing power

• There’s operating leverage. Earnings are growing faster than revenues

• Dividend growth potential looks excellent

• The company is doing a reasonable job buying back shares. Total shareholder yield (dividends + buybacks) sits in the 4% range

• Shares trade at a multi-year valuation low

• China isn’t as big of a deal as the bears say

And on the bear side we have:

• Just an okay balance sheet

• The backlog isn’t really growing

Overall, I think Otis is a good business that is trading at a reasonable price. It has a lot of attractive qualities, especially for those of you who want that strong dividend growth.

I’m definitely interested in adding some to my portfolio, but I struggle a little bit with the price. I’d like to pick up shares a bit cheaper, say in the 15-17x forward earnings range. So I’m going to hold out and see if I can pick up shares about 10% lower, in the low-$80 range.

I may regret this, but I am trying to be a little more patient.

Your author has no position in Otis Worldwide, but may add one soon. You can view his portfolio here. Nothing written above is investment advice. It is for research and educational purposes only. Consult a qualified financial advisor before making any investment decisions.