Company Description: Raytheon Company, the world's sixth largest military contractor, specializes in making high-tech missiles, advanced radar systems and sensors, defense electronics, and missile-defense systems.
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
RTN is trading at a premium to all four valuations above. Since RTN's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 41.3% premium to its calculated fair value of $60.4. RTN 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%
RTN 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 1964 and has increased its dividend payments for 9 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
The NPV MMA Diff. of the $1,217 is below the $2,600 target I look for in a stock that has increased dividends as long as RTN has. If RTN grows its dividend at 10.0% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 3.41%. RTN earned a check for the Key Metric 'Years to >MMA' since its 4 years is less than the 5 year target.
Memberships and Peers: RTN is a member of the S&P 500. The company's peer group includes: The Boeing Company (BA) with a 1.5% yield, Lockheed Martin Corporation (LMT) with a 3.7% yield and Northrop Grumman Corporation (NOC) with a 2.2% yield.
Conclusion: RTN did not earn any Stars 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 two Stars. This quantitatively ranks RTN as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $63.48 before RTN's NPV MMA Differential decreased to the $2,600 minimum that I look for in a stock with 9 years of consecutive dividend increases. At that price the stock would yield 3.5%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,600 NPV MMA Differential, the calculated rate is 12.6%. This dividend growth rate is the same as the 10.0% used in this analysis, thus providing no margin of safety. RTN has a risk rating of 2.00 which classifies it as a Medium risk stock.
Like most defense contractors, RTN is facing lower spending from governments around the world, most notably in Europe and the U.S. Increased aggression in Asia and the Middle East could fuel higher demand for certain high tech solutions offered RTN. This could lead to significant international growth for missile defense and defense electronics. With relatively low debt and a low free cash flow payout, the stock could be an attractive selection. However, it is currently trading at a premium to my $60.40 calculated fair value price, so for now I will just watch and wait.
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 RTN (4.2% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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