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 36.9% 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 Four-Year Dividend greater than 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 greater than MMA
The NPV MMA Differential of the $1,115 is below the $1,300 target I look for in a stock that has increased dividends as long as GD has. If GD grows its dividend at 9.4% per year, it will take three years to equal a MMA yielding an estimated 20-year average rate of 3.22%. GD earned a check for the Key Metric "Years to greater than MMA" since its three years is less than the five-year target.
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 1.9% yield, Lockheed Martin Corporation (NYSE:LMT) with a 3.8% 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 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 stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $79.71 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 2.8%.
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 9.9%. This dividend growth rate is above the 9.4% used in this analysis, thus providing no margin of safety. GD has a risk rating of 1.75 which classifies it as a medium-risk stock.
Additional defense budget cuts are likely. However, GD with its diversified offerings is in one of the best positions to survive them. The company's aerospace business continues to enjoy a significant backlog for large-cabin aircraft, and should remain strong over the next several years.
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. GD is currently trading above its calculated fair value price of $61.76. This is a solid company, and I will continue to look for opportunities to add to my position.
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 (3.9% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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