This article originally appeared on The DIV-Net March 23, 2009.
Linked here is a detailed quantitative analysis of General Dynamics Corp. (GD). Below are some highlights from the above linked analysis:
Company Description: General Dynamics is the world’s sixth largest military contractor and also one of the world’s biggest manufacturers of business jets.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
GD is trading at a discount to 1.), 2.) and 3.) above. Since GD’s tangible book value is not meaningful, a Graham number can not be calculated. If I exclude the high and low valuations and average the remaining two, GD is trading at a 53.0% discount. GD earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
- Rolling 4-yr Div. > 15%
- Dividend Growth Rate
- Years of Div. Growth
- 1-Yr. > 5-Yr Growth
- Payout 15% of avg.
GD earned one Star in this section for 3.) above. GD has paid a cash dividend to shareholders every year since 1979 and has increased its dividend payments for 15 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)? 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:
- NPV MMA Diff.
- Years to > MMA
GD earned both of the available Stars in this section. The NPV MMA Diff. of the $21,585 is in excess of the $7,500 minimum I look for in a stock that has increased dividends as long as GD has. GD’s current yield of 4.02% exceeds the 3.22% estimated 20-year average MMA rate.
Other: GD is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. GD has a long-term record of consistent earnings and dividend growth, which is reflected in its S&P Quality Ranking of A+. At the end of 2008, the company had a strong balance sheet with over $1.6 billion in cash just under $3.8 billion in debt. With a conservative debt to total cap of 27%, GD has the needed headroom to access the debt market for strategic needs. The company’s strong free cash flows and a 20% cash payout ratio, should ensure the dividend in the near-term. Risks include cuts in the military budget, failure of the company to execute existing contracts, failure to win new contracts and a further deterioration in its business jet backlog.
Conclusion: GD earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks GD as a 4 Star-Buy.
Using my D4L-PreScreen.xls model, I determined the share price could increase to $56.66 before GD’s NPV MMA Differential fell to the $7,500 that I like to see. At that price the stock would yield 2.63%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $7,500 NPV MMA Differential, the calculated rate is 6.1%. This dividend growth rate is well below the 11.2% used in this analysis, thus providing a margin of safety. GD has a risk rating of 1.50 which classifies it as a low risk stock.
With its conservative balance sheet and strong free cash flows, GD is in a good position to weather near-term setbacks. The company is quick to react to the changing environment as demonstrated earlier this year when it reduced its workforce by 1,200 workers as result of the deterioration in its business jet backlog and continued weak demand. GD has earned a spot on my watch list with a buy price of $56.66. Though GD is trading well below my buy price, I plan to watch for additional deterioration in its business, which could lead to a better entry point. For additional information, including the stock’s dividend history, please refer to its data page.
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 held no position in GD (0.0% of my Income Portfolio).
What are your thoughts on GD?