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Buying large, dividend-paying US companies is generally a good idea for US investors. That’s because most US companies pay dividends on a quarterly basis, compared to annual or half-yearly for many international and UK stocks, respectively. In addition, US dividends are not subject to currency risk and therefore do not fluctuate after their declaration.
I don’t know about you, but I’d rather be paid four small chunks in a year than have to wait a full year for one big chunk. You wouldn’t wait a full year for an employer to pay you, so why should you wait a full year to be paid by a business you are a legitimate owner of?
This brings me Raytheon Technologies Corp. (New York stock market :NYSE:RTX), which I think fits the mold of a large US company trading at a bargain price. This article explains why RTX is currently a wonderful company that can be purchased at a bargain price, so let’s get started.
Why RTX?
Raytheon is a serious aerospace and defense company that provides advanced systems and services to military, government and commercial customers around the world. It took its current form following its merger with United Technologies two years ago and consists of four main business segments, Missiles & Defense, Intelligence & Space, Collins Aerospace Systems and Pratt & Whitney. Over the past 12 months, RTX has generated over $65 billion in total revenue.
Like most defense contractors, Raytheon has built a broad-rocking business model on its specialized relationships with the US government and the patents around its technologies. This includes missiles, defense systems, space warfare systems and computer services for government. Given geopolitical tensions around the world, many analysts expect increased spending in each of these areas. This was noted by Morningstar in its recent analyst report:
We expect the military’s increased emphasis on defense against great power conflict to drive material investment in each of these exhibits, excluding government IT services. Fiscal stimulus used to support the US economy during the COVID-19 pandemic has significantly increased US debt, and higher debt levels are generally a predictor of fiscal austerity. We expect the fiscal environment to flatten rather than decline, as we believe heightened geopolitical tensions between major powers should boost spending despite the debt burden. We believe entrepreneurs can continue to grow despite a slowing macro environment due to large backlogs and the National Defense Strategy’s increased emphasis on modernization.
This is supported by Raytheon’s multiple recent wins with the US Navy and US Air Force, including a $985 million contract last month from the US Air Force to develop a hypersonic attack cruise missile. . Meanwhile, RTX continued to see sales grow in a difficult economic environment, with sales growth of 3% year-on-year (4% organic growth) during the second quarter. This was driven by increased consumer travel demand and resilient end-market demand with $24 billion in rewards. Importantly, RTX is maintaining strong shareholder returns, with $1 billion in share buybacks in the second quarter alone.
Potential headwinds for RTX include the possibility of an economic downturn, which could affect consumer travel and demand for RTX’s business operations. However, I consider this to be more than offset by robust defense spending on the horizon, driven by geopolitical tensions. This is reflected in RTX’s defense backlog of $65 billion, up $2 billion year-to-date. Additionally, Congress recently increased defense spending for fiscal year 2023 by a significant amount, as management noted on the recent conference call:
We are also encouraged by the markets we have seen in Congress. The House Armed Services Committee proposed a $37 billion increase at the administration’s request, a 9% increase from FY22, excluding supplements. On the Senate side, the Senate Armaments Services Committee went even further by proposing a $45 billion bar, which resulted in a 10% increase in the DoD budget from FY22, bringing the FY23 budget at over $815 billion. It is very different from what we expected 2 years ago.
We are encouraged by the support for our programs with the Authorization Committees recommending significant increases in spending over the President’s budget request, including increases for Stingers, Javelins, next-generation jammers, Tomahawk cruise, to name a few. And as I said, our key programs in technology and cyberspace, missiles, missile defense and non-kinetic effects are also well aligned with the defense priorities of the United States and our allies. .
Meanwhile, RTX sports a very good A- credit rating and has a low long-term debt-to-equity ratio of just 31.8%. Recent price volatility has pushed the dividend yield up to 2.7%, and it comes with a very safe payout ratio of 45% combined with 28 consecutive years of growth, making RTX a type of stock. all-weather that has survived multiple adversities and economic downturns.
Given the above, I find value in RTX at the current price of $83.11 with a forward PE of 17.7, well below its normal PE of 27.5 over the past decade. While the current valuation isn’t a bargain from a traditional valuation perspective, one must also consider the moat-worthy nature of the business and the annual EPS growth rate of 16% to 19 % that analysts predict over the next 2 years. As seen below, this puts RTX well into value territory if these growth estimates materialize.
RTX EPS Estimates (Looking for Alpha)
Key takeaway for investors
Raytheon Technologies is a high quality defense contractor with a wide economic moat. The company is well positioned to benefit from increased defense spending, both in the United States and abroad, as well as the ongoing modernization of military forces. RTX also sports a very strong balance sheet and has a long history of rewarding shareholders. While the stock isn’t cheap in absolute terms, it still seems like good value at the current price given its long-term growth potential.
