Raytheon: Money and Missiles

05/16/2014 7:00 am EST


Charles Mizrahi

Editor, Insider Alert

Our latest Prime Time Portfolio feature was founded in 1922 to produce refrigerators; after this failed venture, it shifted to radio tubes, before developing military radar during WWII, explains Charles Mizrahi, editor of Hidden Values Alert.

Raytheon (RTN) then developed the groundwork for a guided missile; its Patriot missile helped the company's sales increase substantially during the Persian Gulf War.

By the late 1990s it was the Number One US missile maker as a result of several acquisitions. It continues to function as one of the Pentagon's top military contractors.

The Pentagon announced, in February 2014, defense spending would shrink to pre-WWII levels. RTN relies on the government for more than 70% of its revenue.

While this news threatens the company's future business prospects, a backlog of more than $30 billion at the end of 2013 provides a steady source of future income. Additionally, international orders are expected to approach 30% of 2014 sales.

RTN remains the prime contractor of the Patriot missile defense system. It is part of a duopoly with Lockheed Martin in supplying missiles.

Additionally, its track record in the industry, and relationship with the US government, create barriers to entry to potential competitors. Finally, its technological innovations help serve the needs of customers in a constantly evolving military environment.

RTN distributes a $2.42 annual dividend, which represents a 2.5% dividend yield. Management also announced the authorization of a $2 billion stock repurchase program in late 2013. In 2013, the company bought back more 15 million shares, totaling approximately $1.1 billion, reducing outstanding shares by nearly 4%.

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