How Safe Is General Dynamics' Dividend?

The defense industry has done extremely well in recent years, and General Dynamics (GD 0.47%) has stood out from the crowd with its strong performance. The maker of Gulfstream jets and a host of combat systems for land and sea use has seen sales rise dramatically, and the company's efforts to make the most of its profit opportunities have paid off quite well. Yet some are nervous about the sustainability of the industry's upsurge, and concerns about the impact of a slowdown on General Dynamics' dividend have attracted some attention from those following the stock. Let's take a closer look at General Dynamics to see whether investors can be confident in its ability to keep its dividend moving higher.

Dividend stats on General Dynamics

Data source: Yahoo! Finance. Last increase refers to ex-dividend date.

Dividend yield

General Dynamics' current dividend yield is 1.7%, which is slightly below the average among stocks in the S&P 500. Historically, that's relatively low for the defense contractor, which routinely saw yields in the 2% to 4% throughout much of the past decade. Falling yields might suggest lower dividends, but that hasn't been the case for General Dynamics. Instead, it's been a big upsurge in the stock price since 2013 that has sent the yield down despite consistent dividend growth, and that should serve to reassure anyone worried about the stock's yield.

Image source: General Dynamics.

Payout ratio

General Dynamics pays out about a third of its earnings as dividends, which is in line with where the company has been over the last 10 years. Occasionally, General Dynamics has had to take one-time charges against earnings that have made payout ratios temporarily meaningless. Yet absent those artificial adjustments to earnings, the defense contractor has made it clear that it wants to balance dividends with other uses of capital in order to maximize its overall opportunities for business growth in the long run.

Dividend growth

General Dynamics has amassed an impressive track record of dividend growth, becoming a Dividend Aristocrat in the last couple of years and sporting a 26-year streak of rising annual dividend payments. General Dynamics has also recognized the need for greater haste in sharing its bounty with investors, accelerating the pace of dividend increases recently. The company's most recent boost in April amounted to more than 10%, and as you can see below, General Dynamics is definitely not one of the many Dividend Aristocrats that make only tiny dividend increases each year in order to retain their status.

GD Dividend data by YCharts. Note: Spikes in the early 1990s are due to special dividend payments.

What's happened with General Dynamics lately?

General Dynamics has seen its stock continue to do well, but some concerns about fundamental business conditions have arisen in recent months. In its most recent quarterly report, General Dynamics reported a 1% drop in sales, led largely by a declines in Gulfstream jet sales and revenue from information systems and technology. However, better performance in the combat and marine systems areas served to offset those sales declines, and General Dynamics did a good job of keeping profit margin figures on the rise to take greater advantage of its sales opportunities. A declining backlog also had some investors nervous about the contractor's future.

Yet in the long run, General Dynamics still appears to be on course. Rising geopolitical tensions have raised the potential for General Dynamics to make sales internationally, and opportunities like Poland's requests for bids for new tanks could give the defense contractor significant global wins to keep its exposure to the military more diversified geographically. Valuations for the stock have been on the rise, but that doesn't have any direct implications for General Dynamics' dividend.

What to expect from General Dynamics

General Dynamics has worked hard to take advantage of favorable conditions both in the defense industry and in its business aircraft division, and the results have been impressive. With a large margin of safety in its payout ratio and favorable prospects ahead, General Dynamics' dividend should be safe and is likely to keep rising in response to the company's ongoing efforts to grow and expand its reach.