Dividend Farming Scorecard: General Dynamics

In the first post of this year’s blog, I looked at The Southern Company as a potential dividend investment selection for my Dividend Farm.  Since I’ve been a fan of the aviation and aerospace industry for decades, I decided to review General Dynamics (GD).  It’s got a long history of dividend payments so I thought it might be a good candidate to peruse given my portfolio is underweight in manufacturing related holdings.

The table below provides a summary of factors considered as part of the selection process based on data reviewed on January 7, 2019.  Laying out my analysis like this helps me quickly benchmark against my target metrics and compare this firm to alternatives e.g., The Southern Company.

FACTOR	TARGET METRICS	GENERAL DYNAMICS
CCC List	Champion	Champion
Current Yield	4.0%	2.4%
Company Profile	Red Flags	None
Industry Leadership	Top 10	#4
Market Cap	$10 B+	$42.7 B
P/E	< 20	15.4
P/B	< 2	3.6
Debt / Equity	< 1	2.1
Dividend History	25 Years	27 Years
12 Month Price Range	Lower Half	Bottom Quartile
Dividend Payout Ratio	< 75%	35.3%
Portfolio Weight	Under to Slightly Over	Under

The first column lists primary factors.  The middle column lists target benchmarks.  The last column highlights General Dynamics’ metrics so I can see how well they align with my benchmarks.

CCC List: The list references firms found on the DRIPinvesting.org web site in the Champions, Contenders, Challengers list.  GD is a Champion so it’s off to a great start.

Current Yield:  GD’s yield is at 2.4% which means any significant addition to the portfolio will reduce the portfolio average below my target of 4%.  With that said, DRiPInvesting.org shows GD sporting a dividend growth rate in excess of 10% for 1, 3, 5, and 10 year periods.  If the payout ratio is fairly low, that growth right might be sustainable.  The question is, how many years of high growth rate are required for it to generate a dividend return equivalent to an alternative already paying 5% or 6%?

Company Profile:  GD is an aerospace and defense contracting firm providing commercial and military aviation services, combat services, information technology services, and marine services for U.S. Navy and commercial maritime customers.  It’s been in business for nearly 70 years.  Coupled with its size, it shows no indication of decline nor are there immediately obvious red flags from a business perspective.

Industry Leadership:  Preferencing Top 10 companies within their industry means looking for established leaders.  Army-Technology.com listed GD as the 5^th largest aerospace and defense firm in the United States.  That’s a good sign.

Market Capitalization:  Yahoo Finance listed GD’s market cap at $47.7 billion which exceeds another benchmark.

Price to Earnings:  The P/E for GD is well under the maximum target figure of 20.

Price to Book:  P/B is nearly double my target metric.  That could be problematic since I’d prefer not to purchase too much “blue sky” even if it is an aerospace firm.

Debt to Equity:  D/E is more than double my target metric as well.  If a firm is pricing in blue sky along with too much debt, I begin leaning away from it.

Dividend History:  27 consecutive years of dividend payments with the aforementioned dividend growth rate is solid and appealing.

Price Range:  The price range for the stock currently is in about the bottom quartile for the preceding 12 months.  This is goodness to an extent.  However, even at that point, it’s still above $157.  As a result, if I want to add to my portfolio, I’ll have to continue adding to my powder while keeping it dry.

Payout Ratio:  The payout ratio just over 35% could be attractive.  With the healthy dividend growth rates mentioned earlier, the payout ratio indicates those rates may be sustainable for some time.  They have to be to catch alternatives currently paying above 4%, though.

Portfolio Distribution:  Acquiring GD would certainly help my portfolio balance by adding to the manufacturing sector which is light at the moment.  However, I would need to generate a fairly substantial add to move the needle on the balance meter but reduce my portfolio yield in the process.

Analysis:  GD was off to a reasonably good start.  The P/B and D/E figures give me pause as does the general price range.  I’m not convinced that building an investment pool to get more than a handful of shares is worth the blue sky and debt that come with it – particularly if doing so reduces my total yield.   

I don’t currently have a stake in GD.  Whether or not GD stacks up well to alternatives and to my pot of funds available will determine whether or not it gets added.  At the moment, GD and SO appear to be in the same boat, albeit for different reasons.  However, there are several firms to review before I pull the trigger.  Meanwhile, spring is just around the corner with preparation for farming season in full swing.

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions expressed here should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.