Income investors seek a steady stream of dividends. Raytheon’s dividend history is long and it might make a great addition to an income portfolio. Let’s take a look at the business, dividend history, and payout safety going forward.
Business Overview and Highlights
Raytheon (NYSE: RTN) is one of the largest defense contractors in the U.S. The $50 billion business manufacturers many types of weapons and commercial electronics. In fact, Raytheon is the world’s largest producer of guided missiles. The company is based out of Massachusetts and it employs 67,000 people. Last year Raytheon pulled in $27 billion in sales and that breaks down to $404,000 per employee.
The company operates within the industrial sector and maintains a solid credit rating (A+) from the S&P. This allows Raytheon to issue cheap debt to expand operations and finance other initiatives.
On June 9, 2019, Raytheon announced a merger of equals with the aerospace companies of United Technologies.
Raytheon’s board of directors announced a quarterly cash dividend of $0.94. The dividend is made payable on August 8 to shareholders of record on July 10.
10-Year Dividend History
The company paid investors $1.24 per share a decade ago. Over the last 10 years, the dividend has climbed to $3.47. That’s a 180% increase and you can see the annual changes below…
The compound annual growth is 10.8% over 10 years… but over the last year, the dividend climbed 8.8%. The slowdown in dividend growth isn’t a great sign. Although, Raytheon still might be a good income investment. Let’s take a look at the yield…
Current Yield vs. 10-Year Average
Raytheon’s long history of paying dividends makes it one of the best dividend stocks around. This also makes the dividend yield a great indicator of value. A higher yield is generally better for buyers. Sustainability is also vital and we’ll look at that soon.
The dividend yield comes in at 2.1% and that’s below the 10-year average of 3%. The chart below shows the dividend yield over the last 10 years…
The lower yield shows that investors have bid up the company’s market value. They might be expecting higher growth and payouts. But more often than not, the dividend yield is mean reverting with share price changes.
Improved Dividend Safety Check
Many investors look at the payout ratio to determine dividend safety. They look at the dividend per share divided by the net income per share. So, a payout ratio of 60% would mean that every $1 Raytheon earns, it pays investors $0.60.
The payout ratio is a good indicator of dividend safety… but accountants can manipulate net income. They adjust for goodwill and other non-cash items. A better metric is free cash flow.
Here’s Raytheon’s payout ratio based on free cash flow over the last 10 years…
The ratio is volatile over the last 10 years and the trend is up. In 2015 the company increased capital spending which caused the payout ratio to increase. Since then, the trend has returned to the 30% to 40% range. Last year’s payout ratio was 37.3%. This gives wiggle room for Raytheon’s board of directors to raise the dividend.
If you’re interested in seeing more dividend research, please comment below. You can also check out our free DRIP calculator. With it, you can uncover the power of dividend reinvestment growth.
Also, if you are planning your retirement make sure to use our retirement readiness calculator. It will help you find out if you’re on track for a wealthy retirement.
Good investing,
Robert
