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General Dynamics: Another Solid Quarter, Overvaluation Persists

Part-way through earnings season, the outlook remains bright. Many of the most high-quality dividend stocks have beat expectations, and corporate earnings seem to be growing at a rate higher than previous expectations (although time will tell if this trend holds).

On July 26, General Dynamics (GD) reported earnings for the three-month period ending July 2, 2017.

General Dynamics is a well-known dividend stock, partially due to its long dividend history.

The company’s annual dividend payments have increased for 26 years, making it one of the ‘youngest’ members of the Dividend Aristocrats – a group of dividend stocks with 25+ years of consecutive dividend increases. You can see the full list of all 51 Dividend Aristocrats here.

General Dynamics’ second quarter earnings results contained satisfactory growth from this high-quality business.

This article will analyze the company’s second quarter earnings release and investigate whether General Dynamics’ stock is a buy at current prices.

Business Overview & Second Quarter Financial Performance

General Dynamics is a military and defense contractor with a market capitalization of $58.5 billion.

The company is divided into four main segments for reporting purposes:

  • Aerospace
  • Combat Systems
  • Information Systems and Technology
  • Marine Systems

Each segment’s contribution to second quarter revenues can be seen below.

Source: General Dynamics Second Quarter Earnings Release

General Dynamics’ main competitors include:

General Dynamics’ second quarter earnings release was strong from a number of perspectives.

The company reported diluted earnings-per-share of $2.45, a 6.5% increase from the $2.30 reported in the same period a year ago.

In addition, General Dynamics’ company-wide net income of $749 million on revenues of $7.7 billion implied a profit margin of 9.7%. Excluding non-operating expenses, the company’s operating margin of 13.8% expanded by 60 basis points (or 0.60%) from the same period a year ago.

The most important part of General Dynamics’ earnings release was the company’s revision of full-year earnings-per-share guidance.

More specifically, General Dynamics increased per-share profit guidance from $9.50 – $9.55 to $9.70 – $9.75. At the midpoint, this represents an increase of 2.1% over the previous guidance band.

General Dynamics also provided an update on its current share repurchase program.

The company repurchased 2.7 million of its outstanding common shares during the quarter, bringing its year-to-date share repurchase total to 4.6 million.

For context, General Dynamics reported basic weighted average shares outstanding of 299.8 million. The company’s year-to-date share repurchase total of 4.6 million represents ~1.5% of the company’s current...