Linked here is a detailed quantitative analysis of General Dynamics (GD). Below are some highlights from the above linked analysis:Company Description: General Dynamics is the world’s fourth largest military contractor, and also one of the world’s biggest manufacturers of corporate jets.Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham NumberGD is trading at a premium to all four valuations above. Since GD’s tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 67.3% premium to its calculated fair value of $168.05. GD did not earn any Stars in this section.Dividend Analytical Data: In this section, there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%GD earned two Stars in this section for 1.) and 2.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45% The company has paid a cash dividend to shareholders every year since 1979 and has increased its dividend payments for 34 consecutive years.Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA (20-year Treasury bond). Two items are considered in this section, see page 2 of the linked PDF for a detailed description:1. NPV MMA Diff.
2. Years to > MMAThe negative NPV MMA Diff. means that on an NPV basis, the dividend earnings from an investment in GD would be less than a similar amount invested in MMA earning a 20-year average rate of 3.75%. If GD grows its dividend at 6.0% per year, it will never equal an MMA yielding an estimated 20-year average rate of 3.75%.Peers: The company’s peer group includes: Boeing Co. (BA) with a 0.0% yield, Lockheed Martin Corporation (LMT) with a 2.8% yield, and Textron Inc. (TXT) with a 0.1% yield.Conclusion: GD did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section, and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks GD as a 2-Star Weak stock.Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $179.88 before GD’s NPV MMA Differential increased to the $500 minimum that I look for in a stock with 34 years of consecutive dividend increases. At that price, the stock would yield 3.1%.Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 10.3%. This dividend growth rate is higher than the 6.0% used in this analysis, thus providing no margin of safety. GD has a risk rating of 1.5 which classifies it as a Low risk stock.The company has a pristine balance sheet with low free cash flow payout and debt to total capital. GD keeps its yield competitive through annual dividend increases. GD is currently trading well-above its calculated fair value price of $168.05. This is a solid company and I will continue to look for opportunities to add to my position as my allocation allows, but not at the current valuation.More By This Author:Becton, Dickinson And Co. Dividend Stock Analysis
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