I’m relatively cautious on the stock market. But we should take a closer look at certain sectors and industries — particularly ones that will almost certainly continue to garner massive amounts of money no matter what happens next. Given the current state of geopolitics, the defense industry fits that bill, and General Dynamics (GD) is a sector leader, suggests Nilus Mattive, editor of Safe Money Report.
It’s no secret that Washington has been sending a substantial amount of military hardware to Ukraine, including more recent shipments of everything from Patriot missile systems to Abrams tanks. All told, the U.S. has provided over $23 billion in weapons and equipment on top of another $18.3 billion for training and supplies through the Ukraine Security Assistance Initiative. Add to that an extra $4.7 billion in grants and loans.
With an already prolonged war, those numbers will only continue to rise. Yet Ukraine is just a drop in the bucket compared to the spending needed for the U.S. to maintain competitiveness with China, a country that just announced it’ll be increasing its own defense spending by 7.2%.
That brings me to GD. It got its start back in 1899, when it was called the Electric Boat Company. Today, General Dynamics encompasses 10 businesses organized under four divisions:
- Marine Systems: The original Electric Boat subsidiary. It continues manufacturing things like nuclear-powered submarines.
- Combat Systems: Focuses on land-based equipment, including a division that manufactures the M1 Abrams tank.
- Technologies: Produces things like communications equipment and cybersecurity systems.
- Aerospace: Includes the Gulfstream brand and produces aviation equipment for both military and commercial purposes.
Like most domestic defense contractors, GD’s largest customer is the U.S. military. And because of that, the company’s businesses look set to boom. The company’s Q4 2022 earnings increased to $3.58 per share on sales of $10.85 billion. Both of those numbers were slightly better than analysts expected.
For 2023, General Dynamics expects to post per-share profits between $12.60 and $12.65. Taking the midpoint of that forecast and the stock’s recent price of $231 gives us a forward price-to-earnings multiple of 18.3…lower than the S&P 500’s recent forward P/E of 20 and also below the typical multiple in the defense industry.
Meanwhile, the stock’s recent dividend yield was 2.21%, better than the S&P 500’s 1.75%. More importantly, General Dynamics has consistently increased its dividends every year for the past 25 years, making it a dividend aristocrat.
Recommended Action: Buy GD.
