Raytheon (RTN, Financial) has done well over the last one year if we consider the stock upside for this defence giant. However, the stock still have more potential and is a good dividend stock as well. This article discusses the long-term prospects of the company and the reasons for considering the stock as a good investment.
Raytheon Company is a technology and innovation company specializing in defence, security and civil markets globally.
With a history of innovation spanning 92 years, Raytheon provides state-of-the-art electronics, mission systems integration and other capabilities in the areas of sensing; effects; and command, control, communications and intelligence systems; as well as a broad range of mission support services.
Raytheon recorded sales of $24 billion for 2013 and the stock currently has a strong dividend yield of 2.5%, which is sustainable.
As of June 2014, Raytheon had an order backlog of $33 billion and the backlog is 1.4 times the company’s 2013 revenue. A strong backlog ensures that revenue and cash keep flowing and with a clear one year visibility.
Raytheon also had a strong bookings trend in 2Q14 with bookings of $6.7 billion as compared to bookings of $5.3 billion in 2Q13. For the first half of 2014, the bookings trend was equally strong with booking of $11.1 billion.
As a result of the strong backlog, the company has affirmed its strong outlook for 2014 and the company expects net sales of $22.5-$23 billion. On the EPS front, the company expects the EPS to be in the range of $5.76-$5.91. Also, the operating cash flow is expected to be in the range of $2.3 to $2.5 billion and this implies that strong dividends will continue to flow.
Raytheon has also done exceedingly well from a dividend payout perspective in the last 3-4 years. I don’t expect the company to be growing at a very strong pace, but I do expect stable growth and high dividends. The company’s quarterly dividend has increased from $0.31 in 2010 to $0.605 currently. The nearly doubling of quarterly dividend in the last four years is significant and I expect dividends to continue growing as high operating cash flow supports higher payout.
One concern for investors might be the fact that US is going slow on its defence spending budget and this can impact companies like Raytheon. I don’t expect very sharp cuts in the defence budget and I also believe that global diversification will offset any revenue decline from US. In 2013, the international sales were 27% of the total revenue. For the second quarter of 2014, 29% of the company’s sales came from international customers.
This number is likely to increase over the next few years as 37% of the total current order backlog comes from international markets. Raytheon has therefore doing well in terms of global diversification of revenue.
Raytheon is attractive from the perspective of strong fundamentals. As of 2013, Raytheon had a debt to capitalization of 30% and cash & short-term investments of $4.3 billion. In addition, the company has been generating operating cash flows of $2.3-$2.5 billion. Therefore, Raytheon provides investors with an opportunity to buy a company with strong fundamentals, trading at discounted valuations.
Raytheon is also attractive as compared to other players in the industry. The stock is currently trading at a trailing twelve month PE of 14.4 as compared to a TTM PE of 17.6 for Lockheed Martin Corporation (LMT, Financial) and a PE of 21.0 for The Boeing Company (BA, Financial). While all these three companies have a stable outlook for the long-term, Raytheon looks better on a relative basis from a valuation point. The stock upside for Raytheon can be greater than that for Lockheed or Boeing.
GuruFocus rates (business predictability rank) Raytheon 4-stars and this is reflective of a strong overall business along with attractive valuations.
In conclusion, Raytheon will continue to grow at a steady pace and create shareholder value mainly through dividends and buybacks. At current levels, the stock is inexpensive as compared to other peers and can be considered for long-term.
