General Dynamics (GD) is a unique dividend growth stock because it has significant exposure to defense markets but is also a major manufacturer of business jets, resulting in a rather diversified stream of cash flow. The company has increased its dividend or 24 straight years and appears likely to join the dividend aristocrats list this spring.
With long-term contracts, sticky customer relationships, and high barriers to entry enjoyed in many of its markets, it’s no wonder why General Dynamics has delivered double-digit dividend growth for over a decade. Warren Buffett also used to own General Dynamics and even had a 14% stake in the company back in the early 1990s (see all of Warren Buffett’s current dividend stocks by clicking here).
Let’s take a closer look at General Dynamics as we consider it for our Top 20 Dividend Stocks portfolio.
Business Overview
General Dynamics was founded in 1952 and grew largely through acquisitions of military-related companies until the 1990s when it decided to sell off most of its businesses. The company started expanding again by acquiring combat vehicle businesses, information technology (NYSE:IT) companies, shipyards, and Gulfstream Aerospace Corporation.
Today, General Dynamics is a leading global aerospace and defense companies that sells everything from business jets to submarines to combat vehicles to IT communications systems. Approximately 64% of sales are related to products with the remaining 36% tied to services.
Most of General Dynamics’ revenue is from the U.S. Government (57%) with the remainder from U.S. commercial customers (17%), international commercial customers (13%), and international government customers (13%).
Segments
Aerospace (28% of revenue; 40% of operating earnings): delivers Gulfstream aircraft, primarily business jets. The company’s product portfolio focuses on the large- and mid-cabin business jet market. Its operating history dates back more than 50 years.
Combat Systems (18% of revenue; 21% of operating earnings): sells a broad range of combat vehicles and weapon systems primarily for the U.S. It specializes in light armored vehicles. Sales have been declining by roughly 2% per year the last few years.
Information Systems and Technology (29% of revenue; 21% of operating earnings): General Dynamics builds a range of IT networks and advanced communications systems for military, government, and commercial customers. Sales declined by 2% last year and 10% the year before.
Marine Systems (25% of revenue; 18% of operating earnings): sells nuclear submarines and other ships to the U.S. Navy.
Business Analysis
General Dynamics has been able to earn strong returns on invested capital primarily because the barriers to entry in most of its markets are so high. Given the meaningful differences between its aerospace and defense-related businesses, we will analyze them separately.
On the defense side, many of the company’s businesses have been around for a very long time. Some of them even have roots dating back to the 19th century. With so much operating history, General Dynamics has built up very strong relationships with government officials and established a reputation of quality and reliability. New entrants would have a hard time breaking through the strong customer bonds enjoyed by incumbents, especially considering the limited number of contracts given out by the government each year.
Supplying the government with submarines and tanks is also extremely capital intensive. For example, the company’s Virginia class submarine program is ramping up production from one submarine per year to two submarines per year – that’s how massive the construction work is to build a world-class submarine.
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