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Raytheon Company (NYSE:RTN) is a defense contractor providing a host of services to the military. Perhaps its most famous product is the Patriot Air and Missile System used by 12 countries, which includes the U.S. and five NATO countries.

The primary focus in this report is the valuation of the shares and whether or not they present a buying opportunity for dividend growth investors. The shares currently yield 4.3% and trade at a PE of only 7.5. Estimates are for earning to grow between 8-10% over the next five years. The primary risk to the growth rate are budget cuts from governments world-wide.

Price and EPS: The first chart is a long term graph of Raytheon plotted with the EPS since 1980. Earnings have trended upward except for the 4-5 year period from the late 1990s to 2004. The stock declined 50% in 1999 due to the exit from the rapid transit business, revenue shortfalls and lower than expected margins within several of its divisions. In short, the company tried to do too much within a short time frame, which resulted in large charge-offs. The problems are well behind the company as the last seven years of growth resumes the historical upward earnings trend.

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Dividend and Cash Flow: Dividend growth, as well as cash flow per share, have advanced each year, except for the period from 1997 to 2004, during which the dividend was not increased. Though the dividend was not increased during this period it was not reduced. The dividend has increased each year since 2004. Except for the stagnant period, dividend growth has been steady and solid over this 31 year period.

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Relative PE: When viewed with its relative PE with the S&P 500 the shares are quite cheap. In the early 1990s and again in 2000, the shares were valued at similar levels after which strong rallies of over 200% occurred.

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PE and Yield: Over the last 30 years the shares have only yielded (4.3%) this high one time in 2000 following the 50% stock decline. The PE (7.5) is at 30 year lows that have only occurred three other times. Strong advances followed all previous times that the PE was this low. Simply put, the chart below illustrates the excellent valuation infrequently seen in Raytheon shares.

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Technical Picture: It is always best to view charts of securities in different time frames in order to best analyze the overall technical condition. Below is the daily chart for the previous 5 months. The stock is clearly in a downtrend, however, attempts at bottoming in the 39-44 area are evident.

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The monthly charts below shows the stock has retraced nearly back to the bear market lows in 2009, an area that should provide extremely strong support.

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Conclusion: The shares represent very good value when measured by PE as both absolute and relative to the S&P 500 are at excellent levels of valuation. The current yield is at new highs matched only by the high in 1999. Dividends have been increased for the last seven years, and have never been reduced since the inception of cash dividends in 1964. The current payout ratio is only 28%, which makes the dividend very well covered and offers leeway for the company to grow it in the future. The primary risk in the shares are drastic cuts in spending impacting company growth. A market pullback that caused the shares to dip down into the 38-39 area should be regarded as a excellent opportunity for purchase. Initial, smaller positions, can be entered here.

Source: Raytheon At 30-Year Yield Highs