Two Industrials Catching My Eye

This article originally appeared on The Div-Net on October 13, 2011.

I’m a huge believer in investing in dividend growth stocks. In fact, I’m such a huge believer that I’m going to be investing the majority of my net income into such stocks every single month for the next 11 years. If I wasn’t confident that this was a great way to build growing wealth I wouldn’t be betting a significant part of my life on this strategy.

With all that being said, however, it must be noted that investing in the right companies at the right time is critical. I have over 50 stocks on my watch list at any given time, and although I consider all of them worthwhile investments…they aren’t all worthwhile at the same exact time. Some companies are trading for more attractive valuations than others for many different reasons. There are microeconomics, macroeconomics, and individual company concerns that could be inflating or deflating a stock’s price relative to the overall market. It seems that a number of the large blue chip companies like Procter & Gamble, Johnson & Johnson and Coca-Cola are trading for fairly lofty values and although I’m long all three I am not adding to my positions at this time.

I have been interested in a few companies in the industrial sector. It seems there are a lot of depressed stocks in this sector due to the economy slowdown as well as proposed U.S. defense budget cuts. Here are two that are currently catching my eye:

Raytheon Company (RTN)

Per Morningstar:

Raytheon is a major United States defense contractor with nearly $25 billion in annual sales that operates through six segments: integrated defense systems, intelligence and information, missile systems, network-centric systems, space and airborne systems, and technical services. Sales to the U.S. government account for more than 88% of the company’s total sales. Waltham, Mass., based Raytheon employs 72,000 people.

RTN is trading for a current P/E ratio of 7.95, which is well under the industry average. They have an attractive entry yield of 4.04% at current prices with strong dividend growth to boot. They have been growing dividends for seven years, with a 5-year dividend growth rate of 10.8%. They have a pretty low payout ratio of 32% and a pretty strong balance sheet. Their debt/equity ratio is currently at 0.4. I think the proposed slowdown in U.S. defense spending could negatively impact Raytheon’s bottom line, I don’t believe the military is going to reduce its spending significantly, and although it’s a popular budget to attack in the public, defense is as necessary as ever in these turbulent times. I believe in this company long-term. I think it’s trading at an attractive valuation relative to the market and has been punished by going -8% YTD with some of the proposed budget cuts already priced in, in my opinion.

General Dynamics Corporation (GD)

Per Morningstar:

Falls Church, Va.-based General Dynamics manufactures ships, armored vehicles, defense-oriented information technology systems, and business jets. The firm gets around 72% of revenue from the Department of Defense and the rest from foreign sales and Gulfstream business jets. In 2010, the firm generated $32.4 billion in sales and $2.6 billion in earnings. 

General Dynamics is currently trading for a P/E ratio of 8.87 and has an attractive entry yield of 3.01%. The 20-year dividend growth streak is highly likely to keep going for many years into the future. It has a 5-year dividend growth rate of 16%, which is pretty strong. The debt/equity ratio is 0.2. The low payout ratio of 27% encourages many more years of dividend growth. This equity falls into the same boat as RTN, as its revenues depend largely on the U.S. DOD, with 72% of revenues coming from that one location. The nice thing with GD is that they do have some diversification into the commercial sector selling their Gulfstream business jets. I think, as the same with RTN, that budget cuts are priced into this stock. They have suffered in 2011, going -11.89% YTD. This one is pretty high up on my watch list for a potential addition into my Freedom Fund

Full Disclosure: No positions.

Thanks for reading.

Comments

  1. says

    I think a Republican will win the White House in next year’s election. This could bode very well for both of these stocks. Republicans tend to increase defense spending and build military assets. Military assets that were lost in Iraq and Afghanistan will have to be replaced/replenished.

    Hopefully with a different administration and a new direction for the country, the economy will roar back to life. With the strong possibility of the above scenario taking place and the compelling argument you make about valuation and entry yield, RTN and GD look very attractive buy prior to next year’s election.

    Great article!

    Income Pirate

  2. says

    Hey Mantra, sorry for my absence from blogville these days. You have been a writing machine lately – a new post almost every day :)

    I especially like this:

    “I’m a huge believer in investing in dividend growth stocks. In fact, I’m such a huge believer that I’m going to be investing the majority of my net income into such stocks every single month for the next 11 years. If I wasn’t confident that this was a great way to build growing wealth I wouldn’t be betting a significant part of my life on this strategy…”

    Your conviction and intent is so focussed, that indeed you will be a millionaire when you are my age :) Keep up the good work Mantra!

    Cheers
    Dividend Ninja

  3. says

    Henry,

    I haven’t forgotten about UTX. I think that’s a hallmark industrial company…but a little richer in valuation than the two I listed. UTX is definitely on my watch list for a future purchase as well.

  4. says

    Ninja,

    Thanks for stopping by. You’re a busy man, and I can understand. But your absence is always missed!

    I’m glad you liked that paragraph. Sometimes I come on a little strong, but not intentionally. You said it best when you mention my conviction. I’m truly convinced that this is a great way to build wealth.

    Keep up the great work on your end as well. Ninja’s in print, at conventions and online. Great stuff! Take care.

  5. says

    Pirate,

    You may very well be right about next year’s election. I’m truly bi-partisan and I don’t care about party lines. I just want whoever is best for the job seated in the driver’s seat and driving us in the right direction. Obama’s approval ratings have been dismal.

    You are also right about the correlation between Republicans and defense spending. This could definitely bode well for defense stocks like these and others. I always buy for the long-term, so the next four years won’t matter too much to me, but increased earnings and dividends are why I invest of course.

    These two, among a couple others in this space, are definitely attractive in my opinion. That attractiveness probably increases a bit if a Republican is in fact elected as President.

    Take care! Thanks for stopping by.

  6. says

    Everyday Freethought,

    I don’t have it posted anywhere, at least not yet. It wouldn’t be a bad idea to create a separate page with all the stocks I currently follow. A relatively simple idea, yet one I had never thought of. I’ll think on that!

    Thanks for the suggestion!

  7. says

    Hey DM,

    Another great post. I have a friend who works for raytheon; he couldn’t be happier there. Any thoughts on lockheed martin (LMT)?

  8. says

    Big J,

    Thanks!

    I’m glad your friend enjoys working for Raytheon.

    LMT is interesting due to the high yield, and it’s popular among dividend investors. I’m a bit concerned about the high price/book and also the relatively high debt load. I might not mind a small position with LMT, but I think I like other players in this space a bit better.

    What’s your thoughts on LMT?

    Take care!

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