On Apr 4, 2014, we issued an updated research report on defense operator General Dynamics Corp. (GD). The company was the third largest U.S. defense contractor in terms of revenue in full year 2013 after The Boeing Co. (BA) and Lockheed Martin Corp. (LMT).
General Dynamics is amongst the two contractors equipped to build nuclear-powered submarines in the U.S. and its revenue exposure is spread over a broad portfolio of products and services that will keep the overall growth momentum steady.
The company posted a favorable fourth quarter 2013 performance primarily on the back of strong Gulfstream margins driven by the G650, as well as execution from Combat Systems, accompanied with a drop in both operating and interest expenses.
Notably, jet sales at the Gulfstream business are continuing to see traction even in the slowing defense sales scenario. G650, the $60 million top-of-the-line large cabin business jet, sees brisk high demand, with orders booked for the next five years. Gulfstream is expected to contribute significantly to General Dynamics’ earnings going forward. The company expects an approximate 11% year-over-year increase in the group’s full-year 2014 revenues driven by continued strong deliveries of Gulfstream aircraft.
Apart from having a strong order book, General Dynamics’ impressive balance sheet and cash flows provide ample financial flexibility and a cushion for an incremental dividend and share repurchases.
Recently, it boosted its quarterly dividend by 10.7%, marking the 17th consecutive increase. The company has increased the quarterly dividend to 62 cents per share from 56 cents per share, bringing the annualized payout to $2.48 per share. This comes to a healthy dividend yield of 2.4% based on yesterday’s closing price of $105.71. The increased dividend will be paid on May 9, 2014, to shareholders of record on Apr 11. With approximately $2.7 billion of free cash flow exiting 2013, General Dynamics’ solid financial position will easily provide for the payout.
General Dynamics currently has a Zacks Rank #2 (Buy). Other well-placed stocks in the industry include Huntington Ingalls Industries, Inc. (HII) sporting a Zacks Rank #1 (Strong Buy).