In this series of articles I will focus on companies that I either own or would like to own in my buy & hold portfolio. The basic idea is to focus on companies that will not only survive but thrive over the long term, rewarding their owners with both capital appreciation and, in most cases, an ever increasing stream of dividends. We will be taking a look at some of the numbers but mainly these articles are about the reasons behind the success of the company. In this particular article I will be focusing in my largest holding at this time, Raytheon (NYSE:RTN).
The defense industry in general is a very attractive sector due to it acting as an automatic hedge against instability in the world. As long as there are conflicts, or even just the threat of conflicts, governments will be willing to throw significant amounts of money into the defense industry. Ever since human beings started to settle down, wars have been fought. This is unlikely to stop anytime soon, though nowadays the nature of warfare is changing. Books could be written on this subject but to keep it short: we are seeing more conflicts that are smaller in size but longer in duration, as well as significant risk posed by terrorism and other unconventional means including cyber warfare.
There are of course multiple big players in the defense industry so what makes Raytheon stand above the others? Three words: missiles, versatility, vision.
Missiles are still the core business of Raytheon. There are a few particular qualities that make missiles an ideal product to sell. The main advantage is that they have a set date by which they should be used, not unlike the "use by date" you find in grocery products. No respectable military will be stacking up missiles in stockpiles for 30 years, rather they are continuously renewing their inventory and replacing the used missiles with either the same missile or a newer variant of that missile. So conflict or no conflict, missiles will be sold.
The other advantage of the missile business is it's versatility. If we look at the portfolio of Raytheon missiles we will find everything from anti-tank missiles used by infantry to the more obvious uses such as offensive weapons for helicopters and aircraft, as well as larger types of missiles such as the ones used by naval vessels or missile defense and anti-air systems.
Raytheon is much more than just a missile company. The company is split into five different business segments which are Integrated Defense Systems; Intelligence, Information and Services; Missile Systems; Space and Airborne Systems; Forcepoint. (Cyber security)
A list of the products that Raytheon deals in would require an article of it's own but I'll list a few of the more interesting areas they are involved in: radars, communication, training, logistics, air traffic management, electronic warfare, quantum computing and both sensors and other electronic equipment for sea, air, land and space based vehicles. In other words, a large majority of defense related products coming from the USA will have something from Raytheon in it even if the product itself is manufactured by another company. This also holds true for a large amount of military products coming from Western Europe.
This versatility gives Raytheon the flexibility to survive in the defense industry. No matter which company wins a particular contract, Raytheon will most likely be getting a piece of the pie since their technology or services will be integrated to the final product one way or another. This is especially true when talking about larger scale products such as aircraft or naval vessels. This of course brings in stable income but also keeps them designing and developing new technologies on a constant basis.
This is a bit more speculative part as no one can predict the future. However I feel like Raytheon has taken the right steps in preparation for the future of the defense industry. They have heavily invested in technologies relating to intelligence, surveillance, communications and cyber warfare: basically everything that is related to information. Whether it's gathering information, protecting your own information or distributing it safely, Raytheon wants to be there. There have been three very notable acquisitions in this sector: Blackbird Technologies in the end of 2014 and cyber security specialists Websense and Stonesoft in 2015.
What the numbers say?
The company actually had slowly declining net sales during the past few years but change is happening. 2015 provided us with the first year since 2010 that the company managed to increase it's sales. Forecast for 2016 is that sales will continue to grow at a minimum of 3%, mainly lead by international demand.
One of the most important metrics for me, earnings per share, has been a more steady performer. While variance is still there, the average growth rate for EPS from continuing operations for the past five years is 7% per year. Keep in mind that this average of 7% per year was accomplished with their net sales declining on a yearly basis during this time frame. If we look at the past ten years we will get quite an impressive average growth rate of 12.5% per year.
The company currently pays out a dividend of $0.7325 per quarter which equals to $2.93 per year. This gives us a dividend yield of about 2.4% at the time of writing. For long term investments we are of course interested in the dividend growth which has been at a rate of roughly 10% per year.. Their most recent increase (9.3%) was just announced on the 23rd of March and this marks their 12th consecutive year with dividend increases. I fully expect the company to keep increasing their dividend between 7% and 10% on a yearly basis.
One last detail that long term investors will love, Raytheon has a well functioning share repurchase plan. As you might have noticed there are a lot of companies out there who spend massive amounts of money in share repurchases but the results in the form of decreasing share count just aren't there. Raytheon is not of those companies. In fact 2006 was the last time the share count increased, the amount back then was 453.9 million. Fast forward to February 2016 and the company has 299 million shares outstanding. That is a decrease of 34% in a decade!
Raytheon is currently trading at a P/E of about 18, which is actually below the average for the S&P 500. Recent weakness in sales might be the reason for this but the company did manage to break the pattern by posting a sales increase in 2015 and even the low end of their guidance is suggesting a similar increase in 2016.
The company is on a very solid base both due to their wide array of different products and services as well as their position as the number one missile manufacturer in the world. We are seeing solid EPS growth and their share repurchase plan is definitely creating more value for investors on a yearly basis. Their recent acquisitions in the intelligence, information and cyber warfare sector have definitely made the company more future proof as the world is moving to a more technological environment.
Raytheon has been doing things right for a long time and the results are showing. I also believe the company is taking the right steps to prepare for the future, making it a great addition to a long-term portfolio.
Disclosure: I am/we are long RTN.
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.