General Dynamics(GD)

General Dynamic Corporation

Stock: GD

Rating: Good

Author: Waleed M. Tariq

Summary

  • Aerospace & Defense equities gain from geopolitical crises and/or reducing inflation.
  • GD has fair price, strong dividend yield, and steady growth.

Bullish

  1. China is analyzing the global response to Russia-Ukraine while putting money into Taiwan’s defense stocks. If international tensions ease, the economy will return quickly because the Fed is taking steps to curb inflation. Again, as a cyclical business, aircraft and defense companies will benefit.
  2. The pandemic reduced worldwide air traffic in 2020, hurting GD’s aerospace sales and backlog to $8.08 billion $11.6 billion, accordingly. However, post-pandemic tourism has given it boost. In 2021, sales rose 0.7% to $8.14 billion, and the backlog rose 40% to $16.3 billion.
  3. In an inflationary climate, dividend-paying stocks with a stable yield provide short-term income while equity appreciation provides long-term gains. GD’s $1.26 quarterly dividend yields about 2.1% annually. With a 1.8% dividend yield, SPADE is almost double the industry norm of 1.49 percent.

Bearish

  1. Pandemic related supply chain problems have hampered the company’s ability to meet ‘record demand’ for Gulfstream wings. GD claims it will remedy the issue by 2023, but failure to do so will harm its revenue and stock price.

Defense Stocks and Geopolitical Tensions

  • In 2020, pandemic caused global downturn, market slump, government economic support, and record-high inflationary pressures.

Unemployment & Inflation Expectation pre and post pandemic

  • All of this was assisted by escalating geopolitical tensions, particularly Foreign Direct Investment (FDI) limitations, although they were mostly overlooked amid the tumult. Now that the pandemic is over and the geopolitical situation is calm, the aerospace and defense industry is taking the wheel.

Chart

Soaring Inflationary Pressures

  • Non-consumer aerospace and defense equities have historically beaten inflation. They can pass on increasing costs of production to their clients, mainly the government, which accounts for 70% of their revenue.

General Dynamics Corp.

  • The company’s top line grew 1.4% from 2020 to 2021, bringing revenues to $38.5 billion. Net income rose 2.8% to $3.3 billion, and operating margin rose to 11.52 percent. Operating income and FCF more than doubled.

Rebounding Toward New Highs

  • In 2020, the pandemic reduced global aviation travel, reducing GD’s sales and backlog to $8.08 billion & $11.6 billion, respectively. Post-pandemic travel has revitalized the country’s aeronautical industry.
  • The company’s aerospace segment book-to-bill multiple is 1.6x and Gulfstream’s is 1.7x due to aircraft demand. So, in 2021, sales are up 0.7 percent to $8.14 billion, while inventory is up 40% to $16.3 billion.

GD Dividends

  • In an inflationary climate, dividend-paying stocks with stable yield provide short-term income while equity appreciation provides long-term gains.
  • GD’s $1.26 quarterly dividend covers both aspects, yielding roughly 2.1 percent yearly. 
  • This is nearly double SPADE’s 1.08 percent dividend yield and one-third more than the industry norm of 1.49 percent.
  • The corporation has grown its dividends for 27 years. 
  • The solid financial performance should continue expanding and providing greater dividends than the industry median and 5-year average.
GD Dividend Yield Summary
GD Dividend Growth Summary

Valuation

  • think it’s important to contrast the company’s numbers to SPADE’s. The company’s PE and PS permutations are lower than the market average, but PB and PCF ratios are greater. Even with the recent gain, the stock seems to be well valued, with price projections showing less than 10% upside. However, the stock’s upward potential is likely to outweigh the downside risks.

Conclusion

  • Despite the recent increase, investors wanting to buy defense stock will benefit from the fair valuation measures. The stock’s substantial and reliable dividend also attracts investors.