General Dynamics Starts the Year with Healthy 1Q15 Results (Part 4 of 5)
1Q15 cash position
During the first quarter of 2015, General Dynamics (GD) generated $745 million net cash flow from operating activities (or CFO). CFO for its peers Lockheed Martin (LMT), Raytheon (RTN), and Northrop Grumman (NOC) stood at $957 million, -$654 million, and $118 million, respectively. GD, LMT, RTN, and NOC form 2.39%, 2.69%, 1.78%, and 1.66%, respectively, of the Industrial Select Sector SPDR ETF (XLI).
GD ended the quarter with $647 million of free cash flow from operations, which accounts for about 90% of net income. It also repurchased 4.65 million shares during the quarter and increased the quarterly dividend by 11.3% to now stand at $0.69 per share. This was the company’s 18th consecutive annual dividend hike.
Dividend payout
General Dynamics has a healthy history of rewarding investors with growing dividend payouts. It spent about $4.2 billion on shareholders last year and is expected to continue to do so.
Capital deployment exceeds cash flows
During the first quarter of the year, General Dynamics repurchased about 4.7 million shares and spent about $826 million on share repurchases and dividends. This amounts to 1.3 times the company’s free cash flow from operations. Major defense companies like Northrop Grumman, Lockheed Martin, and Boeing have followed a similar strategy of returning cash to shareholders.
There are two main reasons why defense companies have resorted to repurchasing shares. One is the lack of a lucrative investment opportunity that prevents defense companies from putting their cash to efficient use. Another is the high-priced defense stocks that make them unattractive to investors. By repurchasing shares, defense companies are trying to increase shareholder returns.
As the Pentagon budget stabilizes, these companies will look for expansion opportunities that will help their long-term growth.
Browse this series on Market Realist: