GD - Why General Dynamics Is The Right Defensive Dividend Growth Stock

2023-03-22 14:12:50 ET

Summary

• General Dynamics is growing its top and bottom lines and has a record backlog.
• Management has aggressively paid down debt over the past year in a rising rate environment.
• Recent material share price downturn presents an excellent opportunity to layer into this dividend aristocrat.

It's almost always a good idea to buy quality companies while they're cheap. However, that's not what most investors do, and that's what makes markets go up and down.

That's because institutional investors make up the majority of stocks traded on the market, and most of them, including hedge funds, have short-term horizons that make them more inclined to sell on first signs of weakness. Moreover, window dressing is another tactic that some employ to make it seem that they don't hold onto losers on a quarterly investment statement.

Even pension funds have obligations to fulfill and whose fund managers can get the market jitters.

This is all great news, however, for retail investors who aren't day trading to support their livelihoods. With a longer time horizon, one can pick up any number of bargains at different times in a year.

Such I find the case to be with General Dynamics ( GD ) at present, which as shown below, is now trading well off its highs from as recent as earlier this year. Let's explore what makes now an ideal time to layer capital into this moat-worthy dividend stock.

Why GD?

General Dynamics is a leading aerospace and defense company that's been providing innovative solutions since 1952. Its business segments include business aviation, ship construction and repair, land combat vehicles, weapons systems and munitions, and technology products and services. GD employs 100K people and in 2022, generated $39 billion in total revenue. In this article, I highlight recent developments, the debt profile, and updated valuation since my last piece here .

Unlike peer Boeing ( BA ), GD's business is more tilted toward the military side. This benefits GD in that it comes with a more assured and long-range revenue stream. This also results in a sticky relationship, as GD's ingrained technologies and components makes it expensive for the government to readily switch between vendors. This has helped GD to earn an A grade for profitability with an 8.6% net income margin that sits ahead of the 6.5% median for the industrials sector.

This also means that GD is relatively immune to economic cycles, considering that many of its projects are tied to long-term government contracts. This continues to be the case, with GD seeing revenue and EPS growth of 5.4% and 5.6% YoY during the fourth quarter, respectively, despite broader economic pressures from inflation. One of the reasons for slightly higher EPS growth (compared to revenue) is due to capital returns from share repurchases.

As shown below, GD has maintained a solid and steady pace of share buybacks over the past five years despite plenty of economic ups and downs, retiring 8.2% of the outstanding floating over this timeframe.

Looking ahead, it appears that GD's revenue stream is rather assured for the foreseeable future, as has a record backlog of $91.1 billion. Notably, this backlog would have been $600 million higher had it not been currency fluctuations, particularly in the combat systems business. GD is also benefitting from ongoing global tensions in Europe, as it recently secured a sizeable $1.5 billion contract modification manufacture large-caliber metal and mortar projectiles.

Meanwhile, GD maintains a very strong A- rated balance sheet with $1.24 billion in cash on hand. It's also aggressively paid down debt in a rising rate environment, as reflected by the $1.25 billion reduction in long-term debt over the course of 2022. This brings GD's net debt to TTM EBITDA ratio to 1.98x, sitting below the 3.0x level generally regarded as being safe by ratings agencies and making GD well-positioned in the current high interest rate environment.

This also lends support to GD's 2.4% dividend. While it's not particularly high, it does come with a safe 41% payout ratio, 28 years of consecutive growth, making GD a dividend aristocrat, and a five-year CAGR of 8.5%. As shown below, GD scores A and B grades for dividend safety, growth, yield, and consistency.

Admittedly, GD isn't cheap at the current price of $222 with a forward PE of 17.4. However, I believe it fits the profile of a wonderful company trading at a fairly attractive price considering the aforementioned qualities. Analysts have a consensus Buy rating on the stock with an average price target of $267.50 , which equates to a potential 23% total return over the next 12 months.

Investor Takeaway

In summary, General Dynamics is a leading aerospace and defense company that's well positioned to weather economic cycles due to its government contracts, as reflected by growing top and bottom lines in a rising rate environment.

It has a strong A- rated balance sheet and management has aggressively paid down debt over the past year in a rising rate environment. While GD isn't a high dividend stock, its yield still sits well above that of the market average. Lastly, the downturn in price presents a great opportunity to pick up this quality stock at a fair price for potentially rewarding long-term returns.

For further details see: