
General Dynamics Is Often Ignored, but Here's Why It's a Must-Own Stock
General Dynamics (GD) - Get Report might seem like a boring stock to own, especially when there are seemingly sexier tech names to obsess over such as Amazon and Apple.
But this aerospace and defense company churns out more than $30 billion in annual revenue. We explain why it belongs in your investment portfolio. Below, we also unveil an ingenious investment method that won't let you down, regardless of market conditions.
General Dynamics has been quietly winning orders, and its stock offers a safe 2%-plus dividend. What's more, based on analysts' price targets, this defense stock could gain more than 15% in a year.
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From the 1950s to the 1990s, General Dynamic's manufactured tanks, rockets, missiles, submarines, warships, fighters and electronics. In the early 1990s, it offloaded nearly all of the above divisions with the exception of Electric Boat and Land Systems. Since then, it transformed itself, acquiring combat vehicle-related businesses, information technology products and service assets, more shipyards and the Gulfstream Aerospace business, which makes corporate jets.
Between 2006 and 2015, the company's annual sales went from $24.06 billion to $31.47 billion, an increase of more than 30%.
Let's look at peers in the same space: Northrop Grumman saw sales slide from $30.15 billion to $23.53 billion. Lockheed Martin pushed yearly sales to $46.13 billion from $39.62 billion, a decent gain but not as strong as General Dynamics'.
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What's more, over that period, General Dynamics not only expanded sales robustly but also nearly doubled its gross margin, to 19.5% from 10.9%, a jaw-dropping feat, given the stiff competition.
Let's glance through the company's operational blueprint:
General Dynamics is structured as four business groups: Aerospace, which serves the business-jet market; Combat Systems, which is divided into European Land Systems, Land Systems and Ordnance and Tactical Systems; Information Systems, for sophisticated defense, aerospace and communications products; and Technology and Marine Systems (for complex ships).
The stock has been performing well on a return-on-asset basis. General Dynamics's trailing-12-month return on assets is 9.0%, vs. the industry average of 6.2%. The world's largest defense contractor, Lockheed Martin, has a return on assets of 7.8%. On return on equity, General Dynamics outperforms again with 26.8%, beating the likes of Raytheon (19.7%).
There are a few pockets of concern, nevertheless. in the past few months, General Dynamics has under-performed the broader rally of its peer set. Year to date, Northrop shares are up 18%, Lockheed Martin stock is up 18% and Raytheon is up 12%. General Dynamics' shares have risen only 3%. Clearly this promises a window of opportunity to quickly grab this underappreciated defense play.
The average 12-month price target from analysts who cover General Dynamics is $164, suggesting the stock can gain more than 50% from current levels.
General Dynamics is by far the sharpest chance to make killing within its segment. Accoring to analysts' price targets, Boeing has potential upside of 11%, Raytheon is just 1% away from its target price, and Lockheed is expected to decline about 5%.
And finally we look at the income generation metrics; Defense dividends, as we well know, are sacrosanct. The 2.2% annual dividend yield on GD's shares are protected by the indefatigable annual U.S. military spending budget.
So there you have it: eight years of consistent dividend growth and an extremely low payout ratio. GD is hands down a robust income generator and superb growth prospect. Stay with this one for its bargain valuations, comfortable dividends, robust fundamentals and solid earnings outlook (around 9% earnings per share (EPS) growth year over year for the next five years).
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.










