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Stock Analysis: General Dynamics (GD)

Linked here is a detailed quantitative analysis of General Dynamics (GD). Below are some highlights from the above linked analysis:

Company Description: General Dynamics is the world's sixth largest military contractor and also one of the world's biggest makers of corporate jets.

Fair Value: I consider 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 discount to 1.), 2.) and 3.) above. Since GD's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 6.4% discount to its calculated fair value of $65.49. GD earned a Star in this section since it is trading at a fair value.

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 two Stars in this section for 1.) and 2.) 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%. The company has paid a cash dividend to shareholders every year since 1979 and has increased its dividend payments for 17 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)? 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
The NPV MMA Diff. of the $1,090 is below the $1,800 target I look for in a stock that has increased dividends as long as GD has. If GD grows its dividend at 10.1% per year, it will take 5 years to equal a MMA yielding an estimated 20-year average rate of 4.02%.

Other: GD is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index.

Conclusion: GD earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks GD as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $51.39 before PNY's NPV MMA Differential increased to the $1,800 minimum that I look for in a stock with 17 years of consecutive dividend increases. At that price the stock would yield 3.19%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,800 NPV MMA Differential, the calculated rate is 11.7%. This dividend growth rate is higher than the 10.1% used in this analysis, thus not providing any margin of safety. GD has a risk rating of 1.25 which classifies it as a low risk stock.

GD is an important supplier to the U.S. Department of Defense with strategic products such as the M1 Abrams battle tank and Virginia-class nuclear submarines. Near-term, funding for new Virginia Class submarines should provide continued growth. Defense spending will likely ease long-term due to budget deficits and shifting military priorities. However, GD's varied products and acquisitions should allow the firm to continue to generate returns above their cost of capital for years to come. GD is worthy of additional consideration when trading below my buy price of $65.49. For additional information, including the stock's dividend history, please refer to its data page.

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.

Full Disclosure: At the time of this writing, I held no position in GD (0.0% of my Income Portfolio). See a list of all my income holdings here.


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