Retirement Strategy: Playing Offense With A Great Defense

| About: General Dynamics (GD)

There has been plenty of chatter about cost cutting, and reducing the deficit. An election year brings out the rhetoric from everyone and anyone. Basically, it's all about telling the electorate what it wants to hear. For investors, it causes confusion and concern. Not a really healthy mix. (Think; fear and greed)

One of the big cost cutting targets (after entitlements of course) has been on defense spending. After spending over $1 trillion in Iraq and another $500 billion in Afghanistan, anyone can see that those figures are easy pickings for politicians to go after.

General Dynamics (NYSE:GD) is the gold standard in the defense industry, and I believe that no matter what the politicians say about cutting defense spending, it just will not happen. It is time to place GD right into our core holdings of the "Team Alpha" portfolio.

General Dynamics Is the Ultimate Defensive Stock

While GD does not make diapers or tobacco, they do make missiles and advanced military armaments. To me, THAT is defense! It can also be offense, since the world is sitting on a powder keg as usual. Most notably in Iran. I do not want to get into a political debate here, but suffice it to say that cutting defense spending at this time, would be ridiculous.

The beneficiary of "no-cuts" (forget about the potential for an overnight order to increase spending if an "issue" breaks out) will be General Dynamics.

Their general business overview from Fidelity Investments, states the following;

"General Dynamics Corporation, an aerospace and defense company, provides business aviation; combat vehicles, weapons systems, and munitions; military and commercial shipbuilding; and communications and information technology products and services worldwide."

Seems to me that this is the ultimate "defense" stock around.

Let's Look At Some Facts

General Dynamics : Price: $67.20/share, Dividend Yield: 3.10%, ESS Rating: Very Bullish

  • Jefferson Research, Ford Equity Research, Ativo Research, and Market Edge have all recently rated GD as a "buy". There is one "outperform", four "neutrals", and one "sell.
  • The company employs over 95,000 workers worldwide.
  • A market cap of nearly $100 billion places them firmly in the mega of mega cap companies with a global footprint.
  • An extremely low Beta of only .85 gives a glimpse of rather low volatility.
  • 76% of all outstanding shares are held by mutual funds, institutional investors and insiders.
  • The share price/book value is a very reasonable 1.71 for a company of this size and magnitude.
  • A forward P/E ratio of 8.92 is very reasonable, with estimated earnings for 2012 of $7.09/share.
  • Nearly $3.5 billion in operating cash available.

These are extremely attractive fundamentals, and for dividend seeking investors, it gets even more interesting.

  • A dividend yield of 3.10%
  • A tiny payout ratio of 21%
  • General Dynamics has increased dividends for 21 consecutive years. Most recently from $.47/share to $.51/share for more than an 8% "raise" this time around.

Not all has been perfect of late, with a flat revenue stream and a dip in earnings last quarter. These jolts have placed some pressure on the share price, but let's look at this chart:

The share price has dropped from around $74.00/share since April. As of the last quarterly report, the enterprise value and revenues have increased, while the share price has dropped. To me, this appears undervalued, and an opportunity for shareholders to achieve "alpha"; potential capital appreciation as well as a healthy dividend while we wait.

My Opinion And "Team Alpha"

Recently, "Team Alpha" has gone through some significant changes. most notably, we have sold our entire holdings in both Annaly Capital (NYSE:NLY) and American Capital (NASDAQ:AGNC).

With these 2 articles; read this on Annaly, and read this on American Capital, we sold our positions and hopefully helped others with our reasoning. While we are looking at BDC's (check this out) to pump up our dividend yield, we also need to place another solid dividend winning stock into the mix.

General Dynamics fits the bill.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.