Is it Safe? Is it Cheap? Can it Grow? - General Dynamics

General Dynamics (GD) has been one of the highest ranked stocks on my screen for solid, dividend paying companies. Currently trading at under $55.00 per share GD has a current, indicated dividend of $1.52 per share and yields just under 3%. Over the past ten years, GD has generated a cash return on capital employed of roughly 16% and has a strong track record of increasing earnings.

As I look for companies that increase their dividends on a regular basis, a significant part of my analysis of a company relates to the financial condition that the company is in, specifically as it relates to their ability to pay and increase dividends.

At the end of Q1-2009 General Dynamics had:

• $1.1 billion in cash (equivalent to more than 7 quarters of dividend payments at its current rate. Cash decreased by roughly $500 million during the quarter primarily due to business acquisitions ($168M), Debt repayments ($139M), Dividends paid ($136M) and Stock purchases ($109M).

• A current ratio (Current Assets/Current Liabilities) of 1.2, which is in-line with its ten-year average.

• A Debt to Total Capital ratio of 27% down slightly from 29% at the end of 2008.

• A Sustainable Growth Rate (SGR), which is the theoretical maximum rate of growth the company can achieve long-term without accessing additional capital, of 15%.

GDs’ dividend payout ratios are very comfortable. The 2008 Payout ratios were 23% of earnings, 18% of operating cash flow, and 21% of Free Cash Flow, all of which match the companies’ 10-year medians. For the trailing 12 months ended April 5, 2009, the payout ratios were 23 % of earnings, 20% of operating cash flow, and 32% of Free Cash Flow.

While Morningstar calculates a Fair Value for GD of $65.00, my analysis tends to put a FV quite a bit higher. The range of FV metrics runs from a low of $68.00 based of price to book value to roughly $90 based on other metrics such as PE and Price to Cash Flow.

Discounted cash flow (DCF) values based on projected earnings and dividends range from the low $70’s to the mid $80’s

Over the past ten years GD has increased its’ earnings at an 11% compound annual growth rate, and has increased operating cash flow, free cash flow and dividends at a 12% CAGR.

The answer seems to be yes.

Disclosure: Long GD