Thursday, March 17, 2016

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 fifth 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. When also considering the NPV MMA Differential, the stock is trading at a 45.3% premium to its calculated fair value of $84.48. RTN 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%

RTN earned three Stars in this section for 1.), 2.) and 3.) 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%. RTN earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1964 and has increased its dividend payments for 11 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

The NPV MMA Diff. of the $1,167 is below the $2,400 target I look for in a stock that has increased dividends as long as RTN has. If RTN grows its dividend at 10.4% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 2.67%. RTN earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.

Peers: RTN is a member of the S&P 500. The company's peer group includes: The Boeing Company (BA) with a 3.6% yield, Lockheed Martin Corporation (LMT) with a 3.1% yield and Northrop Grumman Corporation (NOC) with a 1.7% yield.

Conclusion: RTN did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks RTN as a 3-Star Hold stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $90.00 before RTN's NPV MMA Differential increased to the $2,400 minimum that I look for in a stock with 11 years of consecutive dividend increases. At that price the stock would yield 3.0%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,400 NPV MMA Differential, the calculated rate is 13.2%. This dividend growth rate is the higher than the 10.4% used in this analysis, thus providing no margin of safety. RTN has a risk rating of 2.00 which classifies it as a Medium risk stock.

Like most defense contractors, RTN is facing potentially lower spending from governments around the world, most notably in Europe and the U.S. To this point, the industry has emerged relatively unscathed. This is due to demand for more fuel efficient aircraft by airlines worldwide, increased aggression in Asia and the Middle East leading to higher international demand for missile defense and defense electronics and increasing use of unmanned aircraft. The company also enjoys a large project backlog.

RTN has excellent dividend fundamentals including a free cash flow payout of 43% (up from 61% in the last review) and a low debt to total capital of 34%. The stock is currently trading at a premium to my $84.48 calculated fair value price. The stock is one to watch, but not one that I am not buying at this time.

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 (5.7% of my Dividend Growth Portfolio) and also long LMT. See a list of all my Dividend Growth Portfolio Holdings here.

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Tags: RTN, BA, LMT, NOC,