Company Description: General Dynamics is the world's fourth largest military contractor and also one of the world's biggest makers of corporate jets.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
GD is trading at a premium to all four valuations above. Since GD's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 11.5% premium to its calculated fair value of $61.76. GD did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
GD earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. GD earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1979 and has increased its dividend payments for 22 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
GD earned a Star in this section for its NPV MMA Diff. of the $2,261. This amount is in excess of the $1,300 target I look for in a stock that has increased dividends as long as GD has. The stock's current yield of 3.18% exceeds the 2.54% estimated 20-year average MMA rate.
Memberships and Peers: GD is a member of the S&P 500 and a member of the Broad Dividend Achievers Index. The company's peer group includes: The Boeing Co. (NYSE:BA) with a 2.5% yield, Lockheed Martin Corporation (NYSE:LMT) with a 5.2% yield and Textron Inc. (NYSE:TXT) with a 0.3% yield.
Conclusion: GD did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks GD as a 4-Star Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $87.84 before GD's NPV MMA Differential increased to the $1,300 minimum that I look for in a stock with 22 years of consecutive dividend increases. At that price the stock would yield 2.5%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,300 NPV MMA Differential, the calculated rate is 7.1%. This dividend growth rate is below the 9.4% used in this analysis, thus providing a margin of safety. GD has a risk rating of 1.50 which classifies it as a Low risk stock.
Additional defense budget cuts are likely. However, GD with its diversified offerings is in one of the best positions to survive them. Aerospace, particularly for large-cabin aircraft, should drive GD's growth over the next several years. Deliveries of large-cabin aircraft rose in 2012 with 104 deliveries, compared to 90 in 2011 and 75 in 2010. The mid-cabin market should recover in 2013.
Q4/2012's loss included a $2 billion dollar non-cash goodwill impairment in the IS&T segment. In addition, the company recognized several other discrete charges in the quarter including: $191 million impairment of intangible assets associated with Jet Aviation's maintenance business, $405 million related to our European Land Systems business, $110 million impairment of intangible assets associated with a prior acquisition in the optical products area of the business and $38 million to write-off obsolete inventory.
The company has a pristine balance sheet with low free cash flow payout and debt to total capital. GD keeps its yield competitive through annual dividend increases. Earlier this month, GD raised its dividend 9.8% to $0.56 per share. GD is currently trading above its calculated fair value price of $61.76. Understanding the nature of the Q4 charges, I will carefully consider adding to my position in the future.
Disclosure: At the time of this writing, I was long in GD (2.7% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.