Written by Summary
General Dynamics is having a good year as the world recognizes the importance of defense spending due to geopolitical volatility and the war in Ukraine.
However, regardless of mid-term developments, General Dynamics is in a fantastic spot to deliver long-term shareholder value thanks to a low debt load and high FCF.
The valuation isn’t deep value after the surge this year, but I see enough potential for investors at current prices.
Scott Barbour/Getty Images News Introduction
My followers know that I have a thing for quality US-based defense companies. While I find most defense contractors fascinating, it goes far beyond a hobby as financial numbers matter more than anything when investing or even advising investments to others. Author That’s why General Dynamics ( GD ) is such a good stock for long-term investors looking for dividend growth. The company is emerging from the pandemic with significant growth in its (commercial) aerospace segment with strong orders, backlog, and margin improvements in its defense-focused segments.
In this article, I will update my long-term investment thesis as it has been a while since my most recent General Dynamics article was published in August of 2021. I will tell you why it’s not too late to buy a stake despite the 12% year-to-date stock price appreciation caused by the ongoing war in Ukraine.
So, bear with me! Sleeping Well At Night
To me, one of the most important things when buying a long-term investment is safety. The feeling that a company won’t go belly under in a recession or because new development is turning the industry upside down. I don’t really care too much about cyclical declines in sales and profits as that will bounce back. In my portfolio, my biggest concern is that oil and gas companies cut their dividends in a steep downturn. Right now, that’s not an issue, but who knows what the market looks like 10-20 years from now.
That’s why I like the big US defense companies so much. While they are dependent on government orders instead of commercial demand (I’m painting with a very broad brush here), there is no reason to believe that any government (Democrat or Republican) can afford to neglect the defense industry. I don’t mean because there’s always a war somewhere but because most defense companies are on the top of aerospace supply chains that (indirectly) employ millions of Americans.
The graph below shows the logarithmic chart of total Federal national defense consumption expenditures and gross investment. The shaded area displays recessions. In recent times, every recession has caused spending to increase. It’s a rather easy way to support economic growth. An F-35 jet for example is (indirectly) dependent on thousands of suppliers. By ordering more jets, the government keeps the supply chain alive. It’s the perfect trickle-down effect. St. Louis Federal Reserve And on top of that, the world is quickly evolving. The Chinese and Russians are experimenting with advanced hypersonics, China is increasingly trying to compete with the US when it comes to advanced jets, and – the worst part is – the world is increasingly volatile. At least when it comes to geopolitical tensions. The US exit from Afghanistan, the ongoing war in Ukraine, Chinese threats towards Taiwan, and the impact of the ongoing food crisis.
In 2011, when crop prices were close to current levels, we got unrests in the Middle East that triggered civil wars that are still going on to this date.
Speaking of the war in Ukraine, Europe has finally figured out that it needs to increase spending to stay up-to-date and ready to assist its allies (like Ukraine). Right now, Ukraine is still keeping Russia outside of Kyiv thanks to advanced anti-air and anti-tank weapons from the US and its partners. It’s one of the big benefits that come with being prepared. Hence, I always say that preparation is what benefits companies like General Dynamics, not the actual war. After all, I rather lose money on investments than benefit from a war.
In this case, Germany is looking to boost its defense spending by a one-time investment of EUR 100 billion (roughly $110 billion) and a longer-term commitment to bring defense spending back to 2% of its GDP. Reuters Hence, major US defense contractors are off to a very good start as global uncertainties are expected to boost spending abroad and at home in Washington. Data by YCharts Based on that, General Dynamics is not overvalued, and there’s still a lot of value left. Value In General Dynamics
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