Buybacks -- they're back! With Fed Chairman Ben Bernanke in full money-drop mode again, the market's awash in cash. A lot of companies are convinced that there's no better use for that cash than buying their own stock. The latest firm to come to such a firm conclusion is General Dynamics
As you may recall, the General embarked upon a similar campaign last year. In the wake of Pentagon spending cuts that had investors scrambling to sell defense contractors, companies including General Dynamics, Northrop Grumman
Can it pay?
In theory, yes. General Dynamics has $2.6 billion in cash on hand. At current prices, the 10 million shares it wants to buy would cost just over $756 million. So in theory at least, General Dynamics can buy the shares it's authorized to, any time it likes.
Of course, the company also has $3.2 billion in debt to pay off, so it probably won't blow all its cash in one go. Still, with more than $2.6 billion in free cash flow generated over the past year, I doubt the General will have much trouble executing on its buyback plans at a time of its choosing.
Should it pay?
That's a trickier question. Even if you accept the proposition that Pentagon spending worries have made defense contractors inexpensive in general, that's not to say buying back shares is necessarily the best move for General D in particular. Consider a few alternatives:
P/E |
Price-to-Free Cash Flow |
Projected Growth Rate |
|
---|---|---|---|
General Dynamics |
11.6 |
13.7 |
7.2% |
Lockheed Martin |
11.4 |
27.0 |
8.2% |
L-3 Communications |
10.0 |
8.2 |
8.5% |
Northrop |
10.8 |
24.3 |
9.2% |
Source: finviz.com.
At 11.6 times earnings, General D has a valuation in line with its defense contractor peers. It's certainly less expensive than outliers like finally profitable Textron
What's a better place for you money? Based on current numbers, and today's estimates, L-3 Communications is arguably the best value for your investing dollar. Longer term, though, I still believe the best core stock for your portfolio remains Lockheed Martin. (To find out why, click here.)