US Government Contracts – A blessing or a limitation?

GD - General Dynamics Corporation

General Dynamics is a leading global aerospace and defense company providing a wide range of products and services in business aviation; combat vehicles, weapons systems and munitions; IT services and C4ISR solutions; and shipbuilding. General Dynamics is a global leader in combat systems and is at the forefront of the business-jet industry. The company carries out its operations through four business groups:

  • Aerospace (23% of 2Q19 revenue),
  • Combat Systems (17%),
  • Information Technology (23%),
  • Mission Systems (13%) and
  • Marine Systems (24%).

The U.S. Department of Defense (DoD) is General Dynamics’ primary customer accounting for 65% of the company’s total revenues. U.S. commercial customers constitute ~14% of total revenues followed by non-U.S. commercial and government customers.

Investment Data

Revenue Growth & Market Exposure

With more than six decades of rich experience, General Dynamics has become a partner of choice for many, given its safety, quality and product performance. General Dynamics is the proud owner of some of the world’s most technologically advanced business-jet aircraft, wheeled combat vehicles, command and control systems, and nuclear submarines. Most of General Dynamics businesses are leading global providers of mission-critical products and systems. Gulfstream and Jet Aviation, two of General Dynamics businesses, are global leaders in business aviation services and have powerful brand recognition.

Over the years, the company has grown organically as well as through acquisitions. Its combination with CSRA, a leading provider of IT services has resulted in the formation of a premier provider of IT solutions and services. The company also acquired Hawker Pacific, an integrated aviation services company across APAC and Middle eastern markets, which has added 19 locations to the company’s global footprint. In addition, the company spends a fortune on R&D and capital expenditure to stay competitive. For instance, General Dynamics is incurring significant capital expenditure in the Marine systems segment currently.

General Dynamics is well positioned to benefit from a growing fleet of customer aircraft. The company should leverage from the U.S. government’s increasing focus on defense spending and growing political tension worldwide. A large backlog across all its businesses and robust revenue channels should support future growth. The company is expecting full year revenue of more than $32 billion. Operating businesses with high entry barriers and large government contracts form a strong moat around General Dynamics.

Dividends

General Dynamics is a Dividend Aristocrat with at least 25 years of consecutive dividend increases. The company has raised its dividends by around 10% over the last seven years. It also has a share buyback plan and has repurchased ~$1.8 billion worth of shares in the last year. Its last dividend hike was 9.7%. General Dynamics has grown its dividends at an impressive 10.5% CAGR over the last decade and has a low payout ratio of 35%. It sports a current average yield of 2.2%.

A majority of General Dynamics’ contracts (56% in 2018), especially with the U.S. government, are fixed-price contracts with cost-reimbursement and time-and-materials clause. This adds clarity and predictability to its cash flows, which further results in expected payouts. Given its diversified and profitable businesses, General Dynamics could potentially maintain its dividend hike in the high single to low double-digit rate in the future.
General Dynamics is expecting full year operating earnings of more than $4.5 billion. Earnings have grown at 11% CAGR over the last five years. The company witnessed strong growth in all of its business segments in the last year and operating earnings also registered a growth of 5% YoY. Annual EPS also grew by an impressive 17% last year. Strong operating performance and value-creating capital deployments should support future dividend growth.

Competition

General Dynamics competes with other large aerospace and defense companies, as well as numerous smaller competitors. Few of the large players in the industry are Lockheed Martin, L3 Technologies, Raytheon Company, Northrop Grumman, etc. Lockheed Martin Corporation is one of the largest defense and aerospace companies in the world while L3 Technologies ranks amongst the top ten defense contractors in the world. Raytheon Company is a leading technology company providing defense, civil government and cybersecurity solutions to both domestic and international customers, and Northrop Grumman is a premier provider of military aircraft, autonomous and space systems, and innovative defense and security solutions.

Bottom Line

General Dynamics’ broad product portfolio and proven performance should continue to drive shareholder value in the future as well. Significant capital expenditure should also result in improved performance across various business segments. Increasing global geopolitical risks and the U.S. government’s focus on defense act as strong tailwinds for General Dynamics but not without its risk ahead of future elections.

GD’s large dependency on the US military contract can be a blessing or a curse. 

GD vs Indexes

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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