Thursday, May 8, 2014

Raytheon Company (RTN) Dividend Stock Analysis

Linked here is a detailed quantitative analysis of Raytheon Company (RTN). Below are some highlights from the above linked analysis:

Company Description: Raytheon Company, the world's sixth largest military contractor, specializes in making high-tech missiles, advanced radar systems and sensors, defense electronics, and missile-defense systems.

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 Number

RTN is trading at a premium to all four valuations above. Since RTN's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a slight discount to its calculated fair value of $96.94. RTN earned a Star in this section since it is trading at a fair value.

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%

RTN 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 1964 and has increased its dividend payments for 10 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. 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 > MMA

RTN earned a Star in this section for its NPV MMA Diff. of the $3,574. This amount is in excess of the $2,500 target I look for in a stock that has increased dividends as long as RTN has. If RTN grows its dividend at 12.9% per year, it will take 2 years to equal a MMA yielding an estimated 20-year average rate of 3.31%. RTN earned a check for the Key Metric 'Years to >MMA' since its 2 years is less than the 5 year target.

Memberships and Peers: RTN is a member of the S&P 500. The company's peer group includes: The Boeing Company (BA) with a 2.2% yield, Lockheed Martin Corporation (LMT) with a 3.2% yield and Northrop Grumman Corporation (NOC) with a 2.2% yield.

Conclusion: RTN earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks RTN as a 4-Star Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $110.42 before RTN's NPV MMA Differential decreased to the $2,500 minimum that I look for in a stock with 10 years of consecutive dividend increases. At that price the stock would yield 2.5%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,500 NPV MMA Differential, the calculated rate is 11.6%. This dividend growth rate is the lower than the 12.9% used in this analysis, thus providing a margin of safety. RTN has a risk rating of 1.50 which classifies it as a Low risk stock.

Like most defense contractors, RTN is facing lower spending from governments around the world, most notably in Europe and the U.S. Increased aggression in Asia and the Middle East could fuel higher demand for certain high tech solutions offered RTN. This could lead to significant international growth for missile defense and defense electronics.

As a result of its non-platform-centric focus, RTN is one of the best-positioned companies among the large-cap defense players. Its diversified military products and GaN technology have helped the company gain a mixture a small and big defense contracts. Approximately 80 countries purchase the company's products. In addition, RTN enjoys an industry-leading margin performance well into mid-decade.

With relatively low debt and a low free cash flow payout, the stock is an attractive selection. In addition, it is currently trading at a slight discount to my $96.94 calculated fair value price. As such, I will look for opportunities to add to my position.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in RTN (4.3% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

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Tags: [RTN] [BA] [LMT] [NOC]