Why General Dynamics’ 3.2% Dividend Yield Beats Fatter Payouts at Defense Competitors
Big defense companies are known for their decent dividend payouts, but General Dynamics (GD) has never been the biggest star on this front. Its dividend yield typically lags behind Northrop Grumman (NOC), Lockheed Martin (LMT) and Raytheon (RTN), and at 3.2%, it still does. But General Dynamics has something other defense contractors don’t: a fast-growing jet business that doesn’t need the government’s business.
With the Pentagon getting serious about budget cuts, Wall Street has decided the future looks a bit stunted for all of these Pentagon suppliers.
As their share prices have declined, their dividend yields have risen. In Lockheed’s case, the yield has really moved up; for General Dynamics, it’s less impressive.
If dividend yield were the sole yardstick in this sector, Lockheed shares would be a lock for investors. It’s never that simple, however, particularly when the industry faces so much uncertainty. Because each company sells a different mix of products to Uncle Sam and U.S. allies, each has different prospects, depending on what Defense Department cost-cutters finally decide to do.
Lockheed for example, is still ramping up to fulfill an order for up to 2,400 of the new F-35 strike/fighter aircraft over the next two decades, for a total of $400 billion. But if that massive program gets cut back, Lockheed’s future margins would be damaged.
General Dynamics is certainly exposed to Pentagon cuts as well. It makes submarines and surface ships for the Navy; sells tanks, military vehicles, and munitions like bombs and artillery shells; and provides high-tech spy gear and battlefield-information systems. Some of those programs boomed earlier but are now slowing as America cuts back its presence in Iraq and Afghanistan. Others are holding up.
But General Dynamics also has meaningful non-military operations. Its aerospace group makes the Gulfstream line of business jets, and generated 19 percent of last year’s revenues. Even though the NetJets unit of investing guru Warren Buffett’s Berkshire Hathaway (BRK.A) holding company recently chose to place a multi-billion-dollar jet order with Gulfstream rivals, the Gulfstream business is nonetheless expanding. General Dynamics has been investing heavily to grow the operation.
The business jet business will help offset slippage in the parent’s military work, and experts think General Dynamics, with the backlog it has on its books, will experience only a slight dip in revenues over the next couple years.
General Dynamics has had no difficulty covering its dividend obligations, even as it has been carrying out an ambitious share-buyback program.
General Dynamics does provide a less generous dividend yield than some of its competitors. But with the defense industry’s future so uncertain, cautious income investors may decide the company’s growing non-defense presence makes it a more attractive holding.
With interest rates so low, dividend stocks are drawing lots of investor interest. Of course, even when we buy a stock for its dividend, we’re acquiring the underlying shares as well, so it’s important to check out the company’s fundamentals, and to read its 10-K, before making a commitment.
Read more articles about: Company News
Timeless thoughts for serious business minds
- pharma stocks
- tech stocks
- stocks that look cheap
- money managers
- stocks that look pricey
- retail stocks
- growth stocks
- earnings season
- dividend growth
- energy stocks
- bank stocks
- short sellers
- warren buffett
- entertainment stocks
- value investing
- executive compensation
- federal reserve
- stock screener
- fast food stocks
- overall market
- cyclical stocks
- industrial stocks