Dividend Aristocrats

General Dynamics Stock, a 28 Year Dividend Aristocrat

General Dynamics Stock is a member of the elite S&P 500 Dividend Aristocrats index. This group of dividend stocks have raised dividends for at least 25 consecutive years without missing even one, carry a minimum $3 billion market capitalization and are included in the S&P 500 index.

The S&P 500 is a global index of America’s top 500 publicly traded blue chip stocks and is the best gauge of the performance of the American economy.

General Dynamics last raised its dividend from $1.02 per share in December 2019 to $1.10 in March 2020. This represents a healthy 7.8% dividend growth year over year. This growth rate is slightly lower than the 5 year average growth rate of 10%. However, investors should cherish this stock for having raised dividends for 28 consecutive years without missing a single year.

In this article, we shall explore General Dynamic’s business operations, review latest earnings, inspect dividend growth history, stock valuation and long term performance to the S&P 500 and the S&P Industrial Sector (XLI).

Business Synopsis

General Dynamics is a global aerospace and defense company that sells products across a broad portfolio of industries including business aviation, combat vehicles, weapons systems and munitions, IT and intelligence services, shipbuilding and repair as well as surveillance systems. The company has 10 business units organized in to 5 business segments. The business segments are:

1) Aerospace

This segment produces the best business jet craft in the world through the company’s subsidiary Gulfstream. Known for its brand recognition and relentless safety and performance, Gulfstream has produced over 2,800 aircraft in service in 2019.

A new version of the ultra-long-range Gulfstream G700 is expected to start delivering in 2022 and the plane looks spectacular!

2) Combat Systems

Combat Systems produces lethal and mobile land combat platforms including the Abrams main battle tank, Stryker and Light Armored Vehicles (LAV). Its largest customers include the US, Canadian and British Army.

General Dynamics recently won a $1.3 billion order from the Canadian government for 360 combat support LAVs and $875 million to upgrade the US Army’s battle fleet.

3) Information Technology

This business employs over 30,000 technologists who develop software relating to cyber security, artificial intelligence, security and supply chain solutions, research on health causes like traumatic brain injuries, etc.

4) Mission Systems

This segment develops integrated systems used on ground, sea, space, air and cyberspace. Examples of products sold include MAPS Gen 1 used for battle tank positioning, navigation and timing, TACLANE-Nano used for secure mobile encryption, etc.

Examples of systems produced are Knifefish unmanned undersea vehicles used to identify high risk areas and mines.

5) Marine Systems

This division designs and builds nuclear powered submarines, combat ships and Jones Act ships for commercial customers including the US Navy. This unit recently won a $22.2 billion shipbuilding contract for construction of fifth block of Virginia-class submarines and Expeditionary Sea Base.

General Dynamics generates 66% of all revenues primarily from the United States Government including the Department of Defense, Homeland Security, Health and Human Services, etc. Attached screenshot from the company’s 2019 annual report shows $25.807 billion in total revenues from the US Government in 2019, which grew 9% year over year from 2018’s $23.6 billion.


Revenue Analysis and Share Repurchases

For fiscal year 2019, General Dynamics generated $39.35 billion in revenues and earned a net income of $3.48 billion, implying a net profit margin of almost 9%. Management reported operating margin of 11.8% which fell by 50 basis points from 2018’s 12.3%. Revenues grew 8.8% year over year from 2018’s total of $36.19 billion.

Diluted earnings per share increased by 6.8% year over year to $11.98 per share. The company is reporting a record high orders backlog of $86.9 billion, which is a 28.1% increase from 2018 or $19.1 billion in nominal value. 57% growth is seen in orders for the new Gulfstream G700 aircraft as well as significant new orders including the $22.2 billion order for Block V of the Virginia Class submarine.

As mentioned in the first paragraph, operating margins decreased by 50 basis points. The reason for this decrease is a transition from mature contracts to newer ones which typically have lower initial margins. The biggest segment is Aerospace generating $9.8 billion in 2019 revenues and growing 15.9% year over year. Operating margins are a healthy 15.6%.

Trading on the New York Stock Exchange, General Dynamics Stock is valued at a $42 billion market capitalization and pays a decent 3% dividend yield. This yield is 100 basis points higher than the yield paid by the S&P 500 index.

Screenshot below shows the company has grown revenues from $31.78 billion in 2015 to the present $39.35 billion in 2019, representing a compounded annual growth rate of 4.4% which is healthy. The major reason for this revenue growth was the acquisition of IT Services company CSRA for $9.7 billion in April 2018.

This integration created a new business segment within General Dynamics known as Information Technology. Phebe Novakovic, CEO of General Dynamics made these remarks regarding the acquisition. “GDIT is positioned to deliver cost-effective, next-generation IT solutions and services to the Department of Defense, the intelligence community and federal civilian agencies as they modernize their information systems.”

Moving on to other activities that reward shareholders, General Dynamics has bought back $1.8 billion of its own shares in 2018 and $202 million in 2019. As of December 2019, the company has 6.4 million shares remaining to be repurchased as authorized by the company’s Board of Directors. This equates to roughly 2% of all outstanding stock. This data is made available through the company’s 2019 annual report.

Growth Outlook

In its 1st Quarter, 2020 earnings released on Apr 29th, 2020, General Dynamics reported $8.75 billion in quarterly revenues, a 5.5% drop from the same period last year. Operating earnings were $941 million, with an operating margin of 10.8%. The reason for the revenue decline was delay in deliveries of 11 Gulfstream corporate airplanes. This translated to $600 million in delayed revenues.

Management provided financial guidance for the full 2020 year. Revenues in the Aerospace segment are expected to generate $8.5 billion in sales with approximately 125 to 130 airplane deliveries. It is also the highest operating margin business with 15.7% margin. Information Technology is expected go generate $8.4 to $8.5 billion, while Combat Systems is expected to generate $7.3 billion in revenues for the year.

Earnings per Share for the full year was revised down from an initial $12.55 to $12.60 per share in January 29th, 2020 to $11.3 to $11.4 per share on April 29th, 2020.

Dividend Growth History

General Dynamics has a long history of growing dividends. In fact, the company is a dividend aristocrat having raised dividends for 28 consecutive years. With data from the company’s Investor Relations website, General Dynamics has grown its dividend from a modest $0.48 per share in 1999 to $4.08 in 2019. This represents a compounded annual growth rate (CAGR) of 11.3% over 20 years, which truly is a brilliant performance!

Attached chart shows a steep uptrend in the company’s dividend history. Starting from 2004, management grew dividend in high double digits to upwards of 20% through to 2008. From 2009 to present, the company has grown its dividend in low double digits, which ultimately led to the steep rise in this chart.

As mentioned above, chart below shows the year over year growth in General Dynamic’s dividend payments. During the great financial crisis of 2008, General Dynamics grew its dividend by 20.69% in 2008, 8.57% in 2009 and 10.53% in 2010. The point is the company was not forced to suspend or cut its dividend during the difficult economic period.

This growth was made possible thanks to the US Navy’s increased military spending from the 2000 decade to 2014. As a matter of fact, the US Navy’s budget almost doubled from $88 billion in 2000 to $156 billion as of 2014. Since the US Navy is General Dynamics’ largest customer, the company benefited from this increased defense spending.

Measuring the Dividend Payout Ratio

Lets calculate the dividend payout ratio for General Dynamics. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends.

Free cash flow is the cash a company generates from daily operating activities minus capital expenditures like investing in new plants or equipment.

Free cash flow is calculated from the statement of cash flows, and is not artificially modified using accounting rules or non-cash expenses like depreciation, amortization, fair value revaluations, etc.

In 2019, General Dynamics generated $3 billion in cash from operations and spent $987 million in capital expenditures. What is the free cash flow?

Free Cash Flow = Cash from Operations – Capital Expenditures

Free Cash Flow = $3 billion – $987 million

FCF = $2.01 billion

For fiscal 2019, General Dynamics paid out $1.2 billion in dividends. So what is the dividend payout ratio?

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

Dividend Payout Ratio = $1.2 billion / $2.01 billion

DPR = 60%

A dividend payout ratio of 60% is very reasonable and healthy for a low margin business that General Dynamics is in. It means the company can make accretive acquisitions to grow revenues and profitability, invest in research and development and expand its technological capabilities to win more customers across the globe.

Long Term Stock Performance

General Dynamics Stock has risen from a modest $5 per share in 1990 to $146 as of June 2020. This represents a compounded annual growth rate (CAGR) of almost 12% over 30 years. This is a superb performance over the long term. It is interesting to note that this performance closely reflects the long term growth of the company’s dividend, which stands at around 11% over 20 years.

During the great financial crisis of 2008, the company’s stock dropped from $93 per share in September 2008 to $35 per share in 2009. This was a cumulative drop of 62% from peak to trough. This was also 800 basis points higher than the drop experienced by the S&P 500 at 56%.

Stock Valuation

Bloomberg Analysts’ Consensus expects General Dynamics to earn $11.23 per share in 2020. Using the current stock price of $146 and dividing it in to the expected EPS, we arrive at a forward price to earnings ratio of 13. This valuation is quite cheap because the S&P 500 trades at 21 times forward earnings while the company’s competitors such as Lockheed Martin trade at 14.8 times forward earnings.

Executive Summary

Here is what we like and don’t like about General Dynamics Stock.

Likes

  • 28 years of growing dividends making this a dividend aristocrat stock.
  • A decent dividend yield of 3%.
  • Dividend payout ratio of just 60% which means the company can keep growing its dividend steadily over the next 5 years.

Dislikes

  • 66% of revenues are generated from the US Government. While the defense and US Navy budget has been on the upswing over the last 2 decades, this is still too large of a risk to be dependent on one customer.
  • Investors are assigning a low price to earnings ratio for General Dynamics Stock due to its heavy reliance on the US Government for revenues (see point #1 above).
Market Capitalization $42 Billion
Dividend Yield 3%
Forward PE Ratio 13 times 2020 earnings
Dividend Growth (5 Year Avg.) 10.3%
Dividend Payout Ratio 60%
EPS Growth (5 Year Avg.) 8.9%
2019 Revenues $39.35 Billion
Gross Margin 19%
Net Margin 9%

General Dynamics Stock Dividend Dates

Visit the company’s Investor Relations | Dividend History website to see a history of dividend payments, ex dividend dates and payable dates.

Declared Record Payable Amount Type
03/04/20 04/10/20 05/08/20 $1.10 Regular Cash
12/04/19 01/17/20 02/07/20 $1.02 Regular Cash
08/07/19 10/11/19 11/15/19 $1.02 Regular Cash
06/05/19 07/05/19 08/09/19 $1.02 Regular Cash
03/06/19 04/12/19 05/10/19 $1.02 Regular Cash
12/05/18 01/18/19 02/08/19 $.93 Regular Cash
08/01/18 10/05/18 11/09/18 $.93 Regular Cash
06/06/18 07/06/18 08/10/18 $.93 Regular Cash
03/07/18 04/13/18 05/11/18 $.93 Regular Cash
12/06/17 01/19/18 02/09/18 $.84 Regular Cash
08/02/17 10/06/17 11/10/17 $.84 Regular Cash
06/07/17 07/07/17 08/11/17 $.84 Regular Cash
03/01/17 04/07/17 05/05/17 $.84 Regular Cash

GD Stock Price

To view the latest quote on GD Stock Price, visit the company’s Investor Relations website and select “Stock Information.”

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