Better Buy: General Dynamics Corporation vs. Raytheon

Which defense contractor is smarter for investors right now? Find out here.

Dan Caplinger
Dan Caplinger
Jun 21, 2017 at 5:02PM

The defense industry is cyclical, going through long-term ups and downs as conditions move in and out of favor. Lately, stocks like General Dynamics (NYSE:GD) and Raytheon (NYSE:RTN) have been on the upswing, as the Trump administration looks at boosting military spending and potentially giving defense contractors more business. Yet the president has also been critical of government waste, and some believe that could lead to even more volatility for major defense players down the line. With those countervailing factors in play, investors want to know whether General Dynamics or Raytheon is the smarter pick currently. Let's compare General Dynamics and Raytheon on several key metrics to see which looks more attractive right now.

Valuation and stock performance

Both General Dynamics and Raytheon have benefited from the favorable environment for defense contractors over the past year. But General Dynamics has a clear edge, having risen by almost 50% since June 2016. Raytheon's impressive 22% return over the same time period pales by comparison.

From a valuation perspective, both defense contractors weigh in with very similar metrics. When you look at trailing earnings, General Dynamics has a price-to-earnings ratio of just over 20, compared to about a 21 earnings multiple for Raytheon. Similarly, incorporating future earnings growth expectations leads to an even closer comparison. Both Raytheon and General Dynamics have share prices between 19 and 20 times forward earnings estimates. In terms of valuation, both contractors are in a dead heat, even though General Dynamics has seen much more impressive gains recently.

Gulfstream jets.

Image source: General Dynamics.


Another area in which the two stocks look relatively similar is with their dividends. Raytheon has a slight lead in terms of dividend yield, with its current payout approaching 2%. General Dynamics is slightly behind with a 1.6% yield, although it would likely argue that the biggest boost in its share price has played a big role in pushing its dividend yield down.

Both General Dynamics and Raytheon have built up long histories of dividend growth for their long-term shareholders. General Dynamics reached the 25-year mark of consecutive annual dividend increases in 2016, and it extended that streak to 26 years with an 11% boost to its quarterly dividend earlier this year. Raytheon's streak of 13 consecutive annual dividend increases isn't quite as impressive, but its April dividend increase of 9% compares reasonably well to its industry peer. With neither company paying a particularly large proportion of their earnings to shareholders in the form of dividends -- Raytheon and General Dynamics land in the 25% to 30% payout ratio range -- further dividend growth in the future is a real possibility.

Growth and risk profile

Defense contractors have generally been doing pretty well lately, and both General Dynamics and Raytheon appear to have good potential going forward. Yet for General Dynamics, first-quarter results were somewhat of a mixed bag. The company's commercial business jet business did extremely well, seeing sales climb by nearly 17% from year-ago levels. Yet combat systems sales of military products like Abrams tanks and Stryker armored personnel carriers were up only 3%, and sales fell 8% in the information systems and technology segment and 9% in the marine systems business. Still, healthier profit margin figures helped General Dynamics make the most of the business it brought in, and investors appear enthusiastic about the future prospects for the Gulfstream jet business and its future success in a booming commercial aircraft industry. In that sense, General Dynamics' military business could just be an extra bonus for shareholders.

Meanwhile, Raytheon also enjoyed a solid first-quarter financial performance. Sales were up just 3%, but profit margin figures were up considerably, helping to lift earnings per share by more than 20%. Raytheon's space and airborne systems division had the strongest sales growth at 8%, while the intelligence, information, and services division saw segment sales decline 2% from year-ago levels. Looking forward, Raytheon has high hopes for its Forcepoint cyberwarfare division, and missile systems like the Patriot and Tomahawk will remain useful for the foreseeable future. If geopolitical tensions continue to rise, then many of the products that Raytheon makes will be in greater demand. Without direct exposure to the commercial aerospace industry, however, Raytheon lacks a key component of success that General Dynamics has sought to take full advantage of in its business.

Based on this overall assessment, General Dynamics looks like the better buy for investors right now by a relatively slim margin. Until rising defense spending becomes a reality, General Dynamics will offer a balance of extremely strong commercial numbers that will bolster its growth over the long run.