More Bang for the Buck

04/01/2010 10:58 am EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of DRIP Investor, says defense contractor Raytheon should show strong earnings growth, pays good dividends, and has a reasonable stock price.

Raytheon’s (NYSE: RTN) earnings should show good gains this year and next. The stock has behaved well and is trading around its 52-week high.

However, these shares still offer plenty of value at current prices. (It closed above $57 Wednesday—Editor.) The company’s strengths in the defense sector, such as intelligence, surveillance, and reconnaissance equipment, should remain in demand even if other areas of the defense industry come under budget pressures.

While Raytheon produced the first commercial microwave oven, it is the company’s defense business that drives the ship. The firm’s best known product is its Patriot Air and Missile Defense System. The company also produces the Tomahawk cruise missile. Integrated defense systems and missile systems account for around 42% of total sales.

The company also produces ground-based surveillance and communications products (18% of total revenue), radar systems (17%), intelligence and information systems (12%), and technical services (12%).

The latter unit, which serves both government and commercial customers and provides such services as counter-terrorism training, is the fastest-growing of its segments, with revenue growing 22% in 2009. International customers generate around one-fifth of annual sales. This diversified portfolio of products and services should go a long way toward insulating Raytheon from spending cuts in any one particular area.

Raytheon has managed to put up decent growth numbers. Sales rose 7% in 2009 to $24.9 billion. Per-share profits jumped 24% to $4.89. The consensus analysts’ earnings estimate for 2010 is $4.98 per share, with analysts expecting profits to jump to $5.27 per share in 2011. Given that Raytheon has beaten the consensus earnings estimate in each of the last four quarters, these estimates may prove to be conservative.

Raytheon currently pays a quarterly dividend of $0.31 per share. The firm typically boosts its dividend in the first half of the year, and a dividend increase of at least 5% is expected in 2010. The current yield is 2.2%.

Raytheon trades at 11x the 2010 consensus earnings estimate of $4.98 per share, a discount to its sector earnings multiple and a relatively modest valuation for a firm expected to show consistent growth.

The stock traded in the $60s in 2008, and a return to that level is expected over the next 12 months. These shares are a Buy at current prices.

Raytheon’s dividend reinvestment plan requires ownership of at least one share to enroll in the plan.

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