The company has managed to deliver a 6.10% annual increase in EPS since 2008. Analysts expect General Dynamics to earn $12.66 per share in 2020. In comparison General Dynamics earned $11.98/share in 2019. In today's environment, we should take earnings estimates with a huge grain of salt however, because there will be disruptions near term. I believe long-term earnings will bounce back from any temporary disruptions.
General Dynamic’s largest customer is the US Government, which accounts for 60% revenues. International defense sales account for close to a quarter of revenues, while the rest is generated from US commercial customers.
Given the constantly changing political climate, there is a high level of uncertainty behind future increases in defense spending coming out of the US. This being said, the company does have other customers in other markets and also other divisions such as the Aerospace one that is producing Gulfstream Jets. Demand in the Aerospace division will be fueled by new product introductions and demand from emerging markets.
The major risks General Dynamics include inability to win any major defense contracts, major cuts in military budgets as well as a potential for slowdown in commercial aviation. That being said, GD has managed to navigate challenging political climates in the past, with an eye on delivering superior shareholder returns.
The world is an increasingly hostile place, and the US being the world cop will surely end up spending more on defense over the next few decades. There is a strong backlog of funded contracts to the tune of 54 billion dollars. The company also has a dominant position in commercial aviation through its Gulfstream jets, which also have a backlog of orders. In addition, General Dynamics is one of the two builders of submarines and warships ( the other being Huntington Ingalls Industries). This is an example of a duopoly, where these companies are able to specialize in the manufacture of the increasingly complex ships and submarines, gain scale, and gain an entrenched position that would preclude newcomers to compete directly. It would be next to impossible for a new company to take over business from the two incumbents.
Strategic acquisitions should also boost earnings per share over time. The most recent acquisition of CSRA that just recently closed is expected to be accretive to earnings per share.
The company has been able to buyback 2.80% of its shares outstanding every year on average over the past decade. This brought the number of shares outstanding from 408 million in 2007 to 291 million by 2019.
The annual dividend payment has increased by 10.40% per year since 2008, which is higher than the growth in EPS.
This was possible, because the dividend payout ratio increased slightly over the past decade. I expect that dividend growth will be slightly higher than earnings growth over the next decade, since the payout ratio still seems low today. However, I would expect annual dividend growth of 6% - 7%/year over the next decade.
The dividend payout ratio increased from 22% in 2007 to 33% in 2019. A lower payout is always a plus, since it leaves room for consistent dividend growth, thus minimizing the impact of short-term fluctuations in earnings. Given the low payout ratio today, I believe that the dividend is safe from dividend cuts. In addition, there is room for slight expansion in the dividend payout ratio over the next decade.
Right now, the stock is attractively valued at 9.30 times forward earnings and yields a defensible 3.45%.
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