GD - General Dynamics: A Dividend Aristocrat With Upside Potential

2023-06-05 15:15:28 ET

Summary

• General Dynamics is a Dividend Aristocrat having raised its dividend for 28 consecutive years.
• General Dynamics' most recent quarter was modestly better than the comparable quarter last year.
• The $33 billion worth of military equipment supplied to Ukraine by the US will have to be replaced at some point.

General Dynamics ( GD ) recently reported first-quarter 2023 results and they were modestly better than the year-ago period.

GD's total return (including dividends) for the last 12 months has underperformed both the S&P 500 ( SP500 ) and fellow defense contractor Raytheon ( RTX ) although not by a significant amount with SPY up 4%, RTX up 2%, and GD down 6%.

General Dynamics is part of the defense contractors sector and provides airplanes, combat infantry equipment, and naval vessels to the defense department. It also provides extensive services to the military.

GD is the sixth-largest defense contractor in the world by market cap.

One big positive that General Dynamics possesses, it is a Dividend Aristocrat , having raised its dividend for at least 25 years.

The question for investors at this point in time is, does GD represent a reasonable potential investment return, including dividends, or should investors be on the lookout for better investment performance going forward?

In this article, we will look at GD's prospects for the next year to try and determine the price direction out to 2024 as compared to the last year.

GD Stock Key Metrics

Let's look at GD's financial metrics, comparing the latest TTM (Trailing Twelve Months) with the previous year. As might be guessed, there are many similar comparisons.

I use the financial metrics to discover what I consider to be positive investment numbers (yellow boxes) and compare them with any negative investment numbers (orange).

One quick look at the financial metrics table above comparing 2022 to 2023 shows that GD has similar numbers for both years.

GD's price (Line 1) dropped 10% over the last 12 months despite a small increase in Revenue (Line 2) of 5%. Gross Margin (Line 4) is also virtually identical 6.6% to 6.4%. This would indicate no improvement in operational efficiency from one year to the next.

The PE Ratio (Line 11) has also improved going from a reasonable 19.5x to an even better 16.9x.

Also, EBITDA (Line 13) was basically the same $5.3 billion in both 2022 to 2023.

However, looking at FCF (Free Cash Flow) on Line 15 we see an enormous decrease down 43% YoY. That bumped the Price to FCF (Line 16) up by a significant 57%.

As Dividend Aristocrats do, GD raised in dividend by 6% ending with a rate of 2.4%.

So General Dynamics had reasonable results over the last 12 months although nothing to write home about.

What Do Analysts Think?

Wall Street and Seeking Alpha analysts are very positive about GD with 18 Buys including a substantial portion (11) of Strong Buys. And more importantly, there are no, zero, nada Sell recommendations. Analysts like General Dynamics a lot.

The quant rating has been very consistent in the last year with a Hold rating for the entire twelve-month period.

Why do analysts like GD and the quant rating doesn't?

Recently, Citi Group remarked that settling the debt ceiling crisis would be good for defense contractors and I agree.

So based on the above ratings General Dynamics seems to be a buy.

How Does General Dynamics' Price Compare To Other Defense Contractors?

A legitimate question when looking at any stock is to compare its performance with other stocks in the same market sector. If we look at GD's performance over the last year and compare it to other large market-value stocks in the defense sector, we can see GD has not performed well with a total return (including dividends) of minus 6%. But the others are not exactly knocking it out of the park either.

In the following chart, we can see that GD has been outperformed by the other major defense contractors Raytheon, Lockheed Martin ( LMT ), and Northrop Grumman ( NOC ) but none of them had anything close to a big year.

This would imply the defense contractor industry in general is waiting for something to happen. Questions concerning the debt, the Russian invasion of Ukraine, and saber-rattling by China have all made everyone nervous. At least the debt issue is behind us so perhaps progress can be made going forward, but there are rumblings in Congress that we may see Defense Department cuts. Only time will tell.

General Dynamics Dividend Record Is Stellar

As mentioned before, GD is a Dividend Aristocrat having raised its dividend for 28 consecutive years, a record few other companies can match.

General Dynamics has raised its dividend by 57% over the last five years. It seems very unlikely that the dividend will be increased by a similar amount over the next five years.

Is GD Stock A Buy, Sell, or Hold?

Obviously, there are risks with a GD investment. For example, if Congress makes any significant cuts to the defense budget GD shares will almost certainly go lower. And in a recessionary environment like we may be facing, GD has historically not done well as the following chart shows its performance during the last official recession of 2007-2009.

But the outstanding record of dividend increases ameliorates some of that risk for long-term investors. And note that GD is down more than 15% since last December.

And I see little likelihood of the threats to the US from China, Russia, Iran, and North Korea will subside anytime soon.

In addition, the $33 billion of military equipment and ammunition supplied to Ukraine will have to be replaced sooner rather than later.

General Dynamics is a Buy for long-term dividend investors.

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