Raytheon Technologies: A Long-Term Dividend Growth Opportunity

Large Caps 0 replies 0 votes 2312 views Tags:  defense budgetsdefense contractordividend growthfuture earningsgeopolitical environmentorder backlogRaytheon TechnologiesRTXstock buybackssustainable dividendstechnological advancementsvalue investing

Raytheon Technologies Corporation (NYSE: RTX), a defense contractor that has caught the attention of many dividend growth and value investors. Raytheon has an impressive track record of raising its dividends for a whopping 29 years in a row, making it a dividend champion. While it hasn't reached the prestigious status of a dividend king just yet, it's still an impressive feat.

Now, past performance doesn't guarantee future results, but it's worth noting that companies with such a consistent dividend history tend to continue increasing their dividends in the foreseeable future. Raytheon's current dividend payout ratio stands at a comfortable 57%. This means that for every $100 in profits, the company pays out $57 in dividends. Ideally, you want a payout ratio around 50%, but anything between 40% and 60% is considered reasonable. With a payout ratio of 57%, Raytheon appears to have room to raise its dividends if its profits continue to grow.

One interesting aspect to consider is the company's share buyback program. By repurchasing its own shares, Raytheon can increase the dividend per share without increasing the total payout. Although there was a significant spike in the number of shares outstanding in 2020 due to a merger with United Technologies, it's important to note that this was a one-time event and not a cause for concern. In fact, excluding that merger, Raytheon has been actively buying back shares and plans to repurchase another $3 billion worth of stock this year, creating more room for future dividend growth.

Looking at the company's financials, Raytheon generates approximately $6 billion in operating cash flow, giving it some flexibility to return cash to shareholders through dividends and stock repurchases. However, it's worth mentioning that the company still carries a total debt of around $36 billion, although the merger with UTX was executed as a stock deal and didn't involve raising additional debt. It's always important to keep an eye on a company's debt levels, as it can impact its ability to sustain and grow dividends.

Now let's turn our attention to the future. We're living in a volatile global political climate, with recent events like Russia's invasion of Ukraine and the potential for China's invasion of Taiwan. As a result, several countries, including Germany and Poland, have announced significant increases in their defense budgets. This bodes well for companies like Raytheon, which specialize in advanced aerospace technologies. Additionally, the ongoing advancements in defense weapons technology create new opportunities for Raytheon to attract customers and remain competitive in the market.

While there are promising factors, we should also consider potential risks. As governments worldwide carry substantial amounts of debt, there may be a push towards reduced military spending and more balanced budgets. If this were to happen, defense budgets could face cuts. However, for such a scenario to materialize, we would likely need to see a significant shift in the geopolitical environment and a diminished threat of war.

It's worth noting that Raytheon currently has a backlog of orders amounting to nearly $200 billion, which represents approximately three years' worth of revenues. While there's always a slight risk of orders being canceled, historically, such cancellations have been rare. The company's solid order backlog provides a level of stability and suggests that its dividends are well-supported.

Analysts are optimistic about Raytheon's future, projecting a 64% increase in earnings per share between 2023 and 2027. If these expectations materialize, we could potentially see Raytheon's dividends almost double in the next five years. Even if the company were to reduce its dividend payout ratio to 50%, significant dividend hikes are still within the realm of possibility.

From an investment perspective, Raytheon appears to be a solid choice. It caters to both dividend growth investors and value investors, boasting a low forward price-to-earnings ratio and trading at around 20 times forward operating cash flow. However, it's essential to remain mindful of the risks, particularly the potential for defense budget cuts by governments. Given the current geopolitical environment, though, such cuts seem unlikely in the near future.

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