Company Description: General Dynamics is the world's fifth 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 discount to 1.) 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 slight discount to its calculated fair value of $65.55. 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 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%.
The company 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 20 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 $1,616. This amount is in excess of the $1,500 target I look for in a stock that has increased dividends as long as GD has. If GD grows its dividend at 10.8% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 4.1%. GD earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.
Memberships and Peers: GD is a member of the S&P 500 a member of the Broad Dividend Achievers™ Index. The company's peer group includes: The Boeing Co. (BA) with a 2.5% yield, Lockheed Martin Corporation (LMT) with a 4.0% yield and Textron Inc. (TXT) with a 0.5% yield.
Conclusion: GD earned one Star 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 five Stars. This quantitatively ranks GD as a 5 Star-Very Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $65.80 before GD's NPV MMA Differential decreased to the $1,500 minimum that I look for in a stock with 20 years of consecutive dividend increases. At that price the stock would yield 2.8%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,500 NPV MMA Differential, the calculated rate is 10.6%. This dividend growth rate is slightly below the 10.8% used in this analysis, thus providing virtually no 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. Defense spending will likely decrease due to budget deficits and shifting military priorities. With 72% of the company's revenue coming from the Department of Defense, the company's earnings will be under pressure. Improving results in Aerospace should help marginally offset declining defense spending.
The stock is trading below my $65.55 calculated fair value price. However, I will be cautious when considering adding to my position due to GD's exposure to future budget cuts.
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 was long in GD (0.9% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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