Our estimate is slightly above managements target

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Our estimate is slightly above management’s target range, as we expect a modest boost from share buybacks. We are boosting our 2019 estimate to $12.75 from $12.30, based on expected contributions from the CSRA acquisition. Our five-year earnings growth rate forecast is 9%. FINANCIAL STRENGTH & DIVIDEND Our financial strength rating on General Dynamics is Medium-High, the second-highest rank on our five-point scale. The company scores above-average on our main financial strength criteria: leverage, fixed-cost coverage, cash flow generation and profitability. GD had cash and cash equivalents of $3 billion and total debt of $4 billion at the end of the fiscal year. The total debt/ capital ratio was 25.8%. Operating earnings comfortably covered interest expense by a factor of 42 last year. Cash flow was negative $500 million in the first quarter, but management is maintaining its cash flow forecast for the year. GD pays a dividend. In March 2018, it raised its quarterly payout by 10.7% to $0.93, or $3.72 annually, for a yield of about 1.7%. This was the 21st straight year in which GD has increased its dividend. We think the payout is secure and likely to grow. Our dividend estimates are $3.63 for 2018 and $4.04 for 2019. GD also uses excess cash to buy back stock. MANAGEMENT & RISKS Phebe Novakovic, 59, has been the CEO of General Dynamics since 2013. Ms. Novakovic was formerly the COO. She has also held management roles in GD’s Marine Services business and in the planning and development division. Jason Aiken, 45, is the CFO. The company has set goals and provided an outlook for the five-year period 2016-2020. It expects compound annual sales growth of 5.6% and compound annual earnings growth of 7.1% during this period. Investors in GD shares face numerous risks. The cancellation of major defense contracts is a risk for the company, which derives more than half of its revenue from sales to the U.S. government. Short-cycle contracts in the Combat Systems and IS&T segments are most at risk, as new contracts can be more easily amended than long-term orders. GD mitigates this risk through its strong position in the business jet space and its solid international business, which accounts for about 20% of revenue. That said, the business jet market is affected by global economic and stock market trends, which are out of management’s control. And in any event, with a Republican in the White House and the House and Senate both controlled by the GOP, the outlook for defense spending has brightened. Congress recently enacted the Consolidated Appropriation Act of 2018, which raised Department of Defense-based budget funding to $600 billion — up 14% from 2017 and the largest year-over-year increase in base budget funding in 15 years. Coupled with funding for overseas contingency operations, the total DoD appropriation rose to $665 billion.
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