Dividual aristocrat General Dynamics

General Dynamics is an American leader in the aerospace and defence industries with a long history of increasing dividends and sustained growth.

About the Company

General Dynamics was founded in 1952 by combining Electric Boat Company, Canadair and several other companies.

For many years the company has evolved to enter new future businesses. The most significant transformation came in the 1990s when General Dynamics started buying technology-focused companies. As a result, General Dynamics ‘ annual sales are approaching $40 billion.

In recent years, the company’s revenue stream has diversified, and now it is no longer dependent on the aerospace segment, as it used to be.

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Below is a breakdown by segment and their contribution to revenue:

• Aerospace industry (21% of revenue);
• Combat systems (19% of revenue);
• Technologies (33% of revenue);
• Marine systems (26% of revenue).

The company’s aerospace segment focuses on business jets and services, while the rest focuses on defence. The company produces the well-known M1 Abrams tank, Stryker machine, Virginia-class submarine, Columbia-class submarine and Gulfstream business jets. These strong businesses have combined to deliver consistent growth over the years.

General Dynamics growth prospects.

2020 was a challenging year for General Dynamics, as the coronavirus pandemic seriously affected global economic growth and the aerospace and defence industries. In the fourth quarter, the company’s revenue declined 2.7% to $10.5 billion, while diluted earnings* per share decreased 0.6% to $3.49. However, the aerospace segment again became the leader in the fourth quarter, showing significant growth compared to the previous quarter.

The company’s revenue decreased by 3.6% for the year, and diluted earnings per share fell from $11.98 to $11.0, or 8.2%. The decline was again due to the adverse impact of COVID–19 on the company’s operations. The total amount of outstanding work is $89.5 billion, and the unfunded amount of exceptional work is ~ $45.2 billion (most of all, it falls on marine systems and technologies). Nevertheless, General Dynamics continues to win large contracts, and the ratio of book value to estimated value is 1.1:1.

General Dynamics ‘ profit and revenue have grown for many years, driven by increased U.S. defence spending and international sales. General Dynamics has created marine and land-based platforms that support maintenance and upgrade contracts and future core contracts. However, the business jet market has been negatively impacted by COVID-19 and travel restrictions. After 2021, experts predict that earnings per share will grow by an average of 6% until 2026.

Estimate and expected return.

The price-to-earnings ratio of General Dynamics shares is 16.8, which is higher than the fair value estimate of 14 times earnings.

If the estimated multiplier decreases from 16.8 to a fair value estimate of 14, this will reduce the annual return by approximately 3.6% per year over the next five years.

Fortunately, the return to shareholders will be boosted by a projected 6% annual increase in earnings per share, as well as a current 2.6% dividend yield. Moreover, the dividend payout is very reliable: the projected dividend payout ratio for 2021 is only 40%, which leaves much room for annual dividend increases.

Considering all these factors, we should expect a total annual return of about 5% in the coming years. That’s a decent rate of return, but it’s not high enough to guarantee a buy rating due to the stock’s revaluation.

Summing up results.

General Dynamics is a high-quality business. In addition, the geopolitical risk remains constant, which gives the company a long growth streak in the future.

Being a shareholder-friendly company, General Dynamics pays significant cash to shareholders in share repurchase rights and dividends.

An increased valuation could limit the stock’s annual return over the next five years. However, investors can expect satisfactory returns and a yearly increase in dividends each year, making General Dynamics a reliable partner for long-term investors.

Note:

• Diluted earnings per share (diluted EPS) are earnings that consider possible changes in the number of shares and profits due to the conversion of other securities into ordinary shares (the exercise of options, conversion of bonds, payment of preferred dividends in new shares).

It should understand that basic earnings per share depend on the weighted average number of ordinary shares traded during a specific period, and diluted (reduced) earnings per share include cutting (lowering) potential common shares that meet particular criteria.

And diluted (reduced) earnings per share also includes dilutive (decreasing) potential ordinary shares, such as options and convertible instruments. The standard sets requirements for publication of these indicators in annual financial statements and is effective from January 1, 1999.

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