General Dynamics (NYSE:GD) has a reliable dividend and is currently trading at low valuation multiples. Its financial position is strong, and I think its prospects for outperforming are favorable.
General Dynamics is one of the largest suppliers of defense products and systems to the government. It is a solid business as evidenced by the steadiness of its earnings and revenue. Its lowest return on equity of the last ten years was quite high at just above 16%.
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General Dynamics has a dependable dividend. Yielding 2.7%, its dividend has been increased 14 years in a row and has been consistent for much longer than that. Its payout ratio is only 24%, leaving room for the dividend to be increased.
Another positive for General Dynamics is its strong financial position. It has a debt to equity ratio of 23.08% and has $2.5B in cash and equivalents, leaving the company lots of flexibility.
General Dynamics derives most of its revenue from federal defense spending. Given the state of the federal deficit, it seems unlikely that defense spending will be a big driver of growth. This is likely why General Dynamics trades with low valuation multiples. Its P/E of 10.07 and EV/EBITDA of 5.88 are very low relative to most other stocks. While I think below market average valuation multiples are justified by lower growth potential, I don't think that General Dynamics' growth is likely to be so low as to justify a P/E of 10.
One plus for General Dynamics is its share repurchase program. For stocks that are undervalued, reducing the shares outstanding has the effect of increasing the portion of the company each shareholder owns.
The biggest risk I see for General Dynamics is the possibility of a significant decrease in defense spending. While a stagnant defense budget seems to be more than priced in, a large decrease, although very unlikely, could have a negative impact. One other potential risk is the fixed price contracts General Dynamics enters into. If prices rise more than expected, it could squeeze margins and lower profitability.
In short, I think that General Dynamics is a good stock to buy, both for its dividend and for its potential price appreciation. Its stable business, strong financial position, and meaningful record at increasing dividends all point towards the likelihood of a stable dividend in the future. While there are a few risks, they appear to be considerably outweighed by the potential upside.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.