General Dynamics in Focus

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This is a guest post by Ben Reynold at Sure Dividend.  Sure Dividend helps individual investors build high quality dividend growth portfolios.

General Dynamics (GD) is the 4th largest publicly traded aerospace and defense corporation based on market cap.

  1. The Boeing Company (BA) has a $89 billion market cap
  2. United Technologies (UTX) has a $83 billion market cap
  3. Lockheed Martin (LMT) has a $67 billion market cap
  4. General Dynamics (GD) has a $42 billion market cap

The company has a long corporate history.  General Dynamics was founded in 1952.  The company has paid steady or increasing dividend every year since 1984.

In addition, General Dynamics has also paid increasing dividends fo4 24 consecutive years.  The company’s April 2016 dividend increase will make it eligible to be a Dividend Aristocrat.

The image below shows General Dynamics’ impressive dividend history:

General Dynamics Dividend History

The company’s long dividend streak shows management prioritizes the dividend.

General Dynamics Operations

General Dynamics operates in 4 segments:

  • Aerospace
  • Marine Systems
  • Combat Systems
  • Information Systems & Technologies (IS&T)

The Aerospace segment is the largest of the 4.  It generated 41% of the company’s operating income in fiscal 2015.

Generaly Dynamics Operating Income by Segment

General Dynamics’ business is built around one very large customer:

That customer is the United States military.

United States government contracts account for over 60% of General Dynamics’ revenue.  If one customer accounts for 60% of a businesses’ revenue, that is typically cause for serious concern.

An exception can be made for the United States government.  It is the largest and most powerful institution in the world.  It is highly likely that the United States military does not contract substantially.  This will result in continued business for General Dynamics.

A business must have a strong competitive advantage to pay increasing dividends for 24 (soon to be 25) consecutive years.  General Dynamic’s close relationship with the United States government forms part of its strong competitive advantage.

Competitive Advantage & Growth

General Dynamics’ competitive advantage comes from its research & development and manufacturing capabilities.

The company receives substantial funding from the United States government for research and development.  In addition to these funds, General Dynamics also spends around $300 million a year on research and development.

General Dynamics most valuable asset is its close relationship with the United States government.  The company is regularly awarded large defense contracts which help grow the business.

The company’s competitive advantages have led to compound earnings-per-share growth of 8.9% a year over the last decade.  Growth has come from a mix of:

  • Reducing its share count by ~3% a year
  • Increasing net margins by ~3% a year
  • Growing revenue by ~3% a year

The company will likely continue compounding earnings-per-share at between 7% and 10% a year going forward.  This growth plus the company’s 2.2% dividend yield results in expected total returns of between 9% and 12% a year for General Dynamics.

Valuation & Final Thoughts

General Dynamics is currently trading for a price-to-earnings multiple of 14.9.  Here’s how the company’s price-to-earnings multiple stacks up versus its peers:

  • The Boeing Company has a price-to-earnings ratio of 18.1
  • United Technologies has a price-to-earnings ratio of 22.1
  • Lockheed Martin has a price-to-earnings ratio of 19.3
  • Raytheon (RTN) has a price-to-earnings ratio of 18.4

The average price-to-earnings ratio of the company’s 4 largest peers is 19.5.  General Dynamics stock has 31% upside based on a comparison of the company’s peers.

General Dynamics is also trading at a discount to the S&P 500.  The S&P 500’s price-to-earnings ratio is currently 22.6.  General Dynamics has higher expected total returns than the overall market, yet trades at a lower price-to-earnings ratio.

General Dynamics is a favorite of The 8 Rules of Dividend Investing.  The company combines a reasonable price-to-earnings ratio, an average dividend yield, and solid total return potential with a strong competitive advantage.

Investors looking for exposure to the aerospace and defense industry will likely do well with General Dynamics.  The company makes a compelling long-term holding for dividend growth investors.

3 thoughts on “General Dynamics in Focus

  1. Thanks for sharing this Ben, very interesting. The dividend graph is very beautiful and it’s hugely unlikely the US is going to reduce its military spending any time soon (if ever).

    Tristan

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