The Raytheon Dividend: On The Brink of Merger, Is RTN Stock A Good Place For Money?

Raytheon Dividend Stock Analysis

I like to have defense sector companies in my dividend stock portfolio.  Why?

Diversification.  When the world is threatened by a big conflict and the stock market goes down, defense sector stocks usually go up.

And, stocks in the defense sector typically pay pretty good dividends.  Let’s take a look at one of my favorites: Raytheon.

Related: Dividend Deep Dive Stock Analysis Process 

Certainly, I will have some thoughts on the Raytheon dividend yield, Raytheon dividend growth and much more. In addition, Raytheon is a member of the Dividends Deluxe dividend stock portfolio.

Related: The Dividends Deluxe Model Dividend Stock Portfolio

Raytheon Today

Raytheon is an international aerospace and defense company headquartered in Waltham, Massachusetts. And, Raytheon stock trades under the stock symbol RTN on the New York Stock Exchange.

Raytheon has four businesses that work together to craft solutions for a wide variety of government and commercial customers.  The four businesses are:

• Integrated defense systems to protect against attack
• Intelligence, information, and services providing cybersecurity products and solutions
• Missile systems for both defensive and offensive situations
• Space and airborne systems including radars, sensors and communication products

Source: Raytheon – Our Businesses

Raytheon Tomorrow

Earlier this year, Raytheon and United Technologies announced that they will combine forces in a merger of equals.

The merger is expected to close in the first half of 2020. The companies will operate under a new name: Raytheon Technologies Corporation.

Before the 2020 merger, United Technologies will separate into 3 entities. 2 of those entities being Otis and Carrier will not be part of the merger.

Raytheon Technologies will operate from a platform of 4 primary businesses:

• Pratt & Whitney aircraft engines & auxiliary power units
• Collins Aerospace & defense products
• Integelligence, space & airborne systems
• Integrated defense & missile systems

The first 2 businesses will come from United Technologies. And the last 2 will be formed by combining Raytheon’s existing 4 businesses.

Source: Defining The Future Of Aerospace & Defense

What Does The Future Hold For RTN Stock & The Raytheon Dividend?

I can’t predict the future. But I do know this is a big merger. And assuming it goes off as planned, it will create a much bigger company with plenty of integration challenges.

Raytheon stock holds a mid-sized position in my personal dividend growth stock portfolio. So what am I trying to accomplish here?

My main objectives for this analysis are to see if Raytheon stock and the Raytheon dividend are:

• On solid footing heading into the merger
• And, look for red flags that would lead me to sell out in advance of the merger

On the surface, I think the merger is a positive. I often wanted to buy stock in United Technologies, but never did. This gives me a chance to become a part-owner without committing new capital.

So let’s check Raytheon’s dividend metrics and business fundamentals. Where appropriate, I will sprinkle in what management is saying about the new company.

Raytheon Dividend Yield

Raytheon pays an annual forward dividend of $3.77 cents per share.

As a result, this gives us a 2.0% Raytheon dividend yield at the recent Raytheon stock price.

Raytheon Dividend Growth Rate

1 Year	3 Years	5 Years	7 Years
8.7%	8.2%	9.3%	9.7%

Historical dividend growth has been strong.  Also, the Raytheon dividend has been increased for 15 consecutive years.

Raytheon Revenue Trend

Revenue has been on a nice uptrend in recent years.

Recent years are in contrast to 2013 and 2014. At that time, revenue growth was pressured from US government spending reductions. These reductions were a result of the Federal government’s budget sequestration.

It is important to note that about two-thirds of Raytheon’s sales are made to the US government.

Raytheon Dividend, Earnings, & Payout Ratio

Earnings have been growing at a healthy rate.

Also, the dividend payout ratio is at a modest level.  It has ranged between 30% and 40% in recent years. And it looks like, for 2019, the dividend as a percent of earnings will be at the low end of that range.

A lower dividend payout ratio is generally better for the investor.  It shows the company has ample room to raise the dividend in the coming years.  Or, withstand an earnings drop without having to reduce the dividend.

Raytheon Credit Rating

Knowing a company’s credit rating is important.  Furthermore, it can make a big difference between companies that struggle to survive during a business downturn and those that prosper.

Also, a corporation’s credit rating is similar to how your personal credit score works.  Most noteworthy, higher ratings mean lower risk to those who lend the company money.  Finally, a higher rating means lenders will likely get their money paid back.

Certainly, we are not lenders here at Dividends Diversify.  We are dividend stock investors.  However, it never hurts to check out a company’s creditworthiness.

Above all, Raytheon is rated investment grade with low credit risk by two of the major rating agencies, Moody’s and S&P.  Most noteworthy, this is a good sign for Raytheon and its lenders.

Raytheon Stock Valuation

Raytheon’s stock price had been on a rapid rise until 2018. And, it has remained in a narrow trading range since the merger announcement.

The sizable jump in 2018 and projected 2019 earnings combined with the 2018 pullback in the stock price has the forward price to earnings ratio settling in at about 16 times earnings.

Raytheon’s price to earnings ratio is at a slight discount to the overall market as represented by the S&P 500. And, a lower price to earnings ratio typically represents a better value for the investor.

With so much uncertainty about the new company, I feel like the market is is “wait and see” mode regarding Raytheon stock.

Raytheon Dividend Stock Analysis Wrap Up

I built my position in Raytheon during 2011-2012.  During that time, the defense industry struggled with the uncertainty of U.S. government spending.  Because of the large stock price appreciation, Raytheon holds a mid-size position in my dividend stock portfolio.

I like the company and its prospects I’m in no rush to sell because of the announced merger and capital gains taxes if I were to sell. But, I have no interest in adding new funds at this time due to the uncertainty of integrating two large companies. Like the market, I am in “wait and see” mode.

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