Raytheon Dividend Stock Analysis
The Raytheon dividend stock plays a key role in my investment portfolio.
What role is that? In a word, diversification.
Our world is threatened by big conflicts from time to time. When they happen, the stock market usually goes down.
But defense sector stocks, like Raytheon Technologies (NYSE: RTX), can buck the trend. And, go up. Plus, defense stocks often pay high dividends.
So, let’s work through a dividend stock review for Raytheon Technologies. And the Raytheon stock dividend.
Certainly, I will have some thoughts on the Raytheon dividend yield, Raytheon dividend growth, safety, and much more.
Should you and I invest in Raytheon? That is the central question.
Also, Raytheon is a member of my model portfolio of dividend stocks.
I call it the Dividends Deluxe. It is home to nearly 40 dividend growth stocks.
Before you go, be sure to check out all of the stocks in the model portfolio. But now, let’s jump into our Raytheon dividend review and stock analysis.
Disclosure: This post contains referral links.
Raytheon was an international company operating in the aerospace and defense sector. They headquartered in Waltham, Massachusetts. And, Raytheon stock traded under the stock symbol RTN on the New York Stock Exchange.
Raytheon had several blue-chip businesses that worked together on solutions for a wide variety of government and commercial customers. The four businesses were:
- 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
In April 2020, Raytheon and United Technologies completed a merger. The companies now operate under the name: Raytheon Technologies Corporation.
Before the merger, United Technologies separated into 3 companies. 2 of those being Otis and Carrier. They were not part of the merger with Raytheon.
Raytheon Technologies now operates from a platform of 4 main businesses:
- Pratt & Whitney aircraft engines & auxiliary power units
- Collins Aerospace & defense products
- Intelligence, space & airborne systems
- Integrated defense & missile systems
The first 2 businesses came from United Technologies. And the last 2 were formed by combining Raytheon’s 4 legacy units that I just described.
What Does The Future Hold For RTX Stock & The Raytheon Dividend?
I can’t predict the future. But I do know this was a big merger.
The merger created a very large company with many integration challenges. Plus, plenty of opportunities.
I owned Raytheon stock (RTN) before the merger. It held a mid-sized position in comparison to my other dividend growth stocks.
What Happened To Raytheon Stock After The Merger?
When the merger closed, as an RTN stockholder, I received 2.3348 shares of stock in the new company (RTX). In exchange for every share of RTN that I owned at the time.
So what am I trying to accomplish here?
My main objectives for this Raytheon stock analysis is to see if RTX stock and the Raytheon dividend are:
- On solid footing since the merger
- And, look for red flags that would lead me to sell out, now that the merger is complete
On the surface, I think the merger is a positive. I often wanted to buy stock in United Technologies, but never did.
So the merger has given me a new opportunity. That is, I’m now part-owner in some of the legacy United Technology businesses.
So let’s evaluate current dividend metrics and business fundamentals for the new Raytheon. Where appropriate, I will sprinkle in what management is saying about the new company.
As always, I will be looking through the lens of a dividend growth stock investor. And from the perspective of a long-time Raytheon owner dating back to before the merger with United Technologies.
Resource: Dividend stock recommendations
A New Raytheon Technologies Dividend Rate Announcement
One of the facts I was waiting for was the new dividend rate announcement from the company.
At the time of the merger, 1 share of Raytheon paid a $3.77 annual dividend. As I mentioned, each Raytheon dividend stock investor received 2.3348 shares of stock in the new company for every share they owned in the old company.
So, the new company had to set a new dividend rate. For me, the new annual dividend rate had to be at least $1.61 per share.
It is just simple math. Otherwise, Raytheon shareholders would receive fewer dividends from the new entity. Versus the cash received in the form of dividends from the old entity.
Anything less than $1.61 per share annual dividend would be a dividend reduction. Raytheon wouldn’t be the first company to pull off a dividend reduction in this manner. I call it a “stealth dividend cut”.
With that background in mind, let’s research all the facts and figures about the new Raytheon dividend.
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Does Raytheon Technologies Pay A Dividend?
Yes. Raytheon pays a dividend.
On April 27, 2020, Raytheon Technologies Board of Directors declared the first quarterly cash dividend for the newly merged companies.
Raytheon Dividend Per Share
Raytheon pays an annual forward dividend of $1.90 per share.
This dividend rate answers the important question I just raised. Raytheon’s new dividend is greater than $1.61 per share.
This means that former RTN shareholders that held their stock through the merger received good news. What’s that?
News of a dividend increase. And a substantial one of more than 18%.
Raytheon Dividend Yield
As a result, this gives us a 3.1% Raytheon dividend yield at the recent Raytheon stock price.
This is a good dividend yield from my perspective. Regular readers know I target dividend yields between 3%-5% when selecting dividend stocks.
Also, Raytheon’s stock price recently corrected. Combined with the dividend increase the company’s dividend yield has gone up. In years past, it was not uncommon for Raytheon’s dividend yield to be less than 2%. And below my target dividend yield.
On the other hand, I justified owning RTN stock at a low dividend yield for 1 reason. What’s that? Attractive dividend growth.
I will look at Raytheon’s historical dividend growth in a moment. But first, a couple more facts about the RTX dividend before we conclude the dividend review.
How Often Does Raytheon Pay Dividends?
Raytheon pays dividends every 3 months or 4 times per year. Each quarterly dividend payment is 47.5 cents per share.
During What Months Does Raytheon Pay Dividends?
Prior to the merger, Raytheon consistently paid dividends in February, May, August, and November.
Subsequent to the merger, it appears the company’s dividend payment pattern has changed. My expectation is that Raytheon will pay dividends in March, June, September, and December.
Raytheon Ex-Dividend Date
To receive the next Raytheon stock dividend payout, you must complete your purchase by the ex-dividend date. Raytheon’s ex-dividend date falls in the month PRIOR to when it pays dividends.
It typically falls at the end of the second week of the month it goes ex-dividend. Realize that the ex-dividend date will be slightly different each quarter.
So, it’s best to check Raytheon’s dividend information on its investor relations website. You can get the exact date for each dividend payment there.
Raytheon Dividend History
Raytheon has a long history of quarterly dividend payments. It appears the company started paying a regular quarterly dividend in 1980.
Furthermore, United Technologies paid cash dividends on its stock every year since 1936. So, it’s easy to conclude that each legacy company placed importance on rewarding shareholders with dividends.
In more recent years, Raytheon management has increased the company’s dividend annually on RTN stock and now RTX stock. The dividend increase streak has run for 16 consecutive years.
Certainly, Raytheon is not even close to being a Dividend King. Or even a Dividend Aristocrat.
But, I like to target dividend stocks of companies that have at least 10 years of annual dividend growth. And, Raytheon meets that criteria.
Speaking of Raytheon dividend growth, I promised to get to that topic. So, let’s discuss it now.
Raytheon Dividend Growth Rate
|1 Year||3 Years||5 Years||7 Years|
The new Raytheon dividend rate is included in the table above. The table shows that past dividend growth has been outstanding.
In my opinion, Raytheon had strong dividend growth before the merger. It averaged about 8-9% per year. And it only got better after the merger.
Time will tell, but for me, the merger created immediate shareholder value. It did so in the form of increasing my dividend payments. From an accelerating dividend growth rate.
Projected Dividend Growth
In contrast, I see a much lower dividend growth rate moving forward. For my planning purposes, I’m going to forecast 6-8%.
Raytheon Dividend Policy
Every company has a dividend policy. Some choose to communicate that policy to the public. Other companies do not.
A formal dividend policy communication is helpful. It allows me to set my future expectations for a company’s dividend. So, I appreciate it when management communicates this information.
On the other hand, I am not aware of formal communication from Raytheon’s management about its dividend policy. I do not consider this a “red flag”. It’s just an indication of how Raytheon chooses to go about its business.
Returning Capital To Raytheon Stockholders
In contrast, Raytheon management has elected to more broadly communicate its intentions for returning capital to shareholders. Return of capital means both providing shareholders with cash from regular dividend payments and repurchasing RTX stock in the open market.
Management has stated that the newly combined company will return $18-$20 billion to shareholders in the first 3 years after the merger.
In the 3 years prior to the merger, Raytheon returned $5.8 billion to shareholders in the form of dividends and share buybacks.
This capital allocation policy sounds about right to me. The company will be tripling in size. So, tripling its return of capital to shareholders sounds good.
A stock analysis wouldn’t be complete without looking at some of the business fundamentals. So, let’s do that next.
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Raytheon Revenue Trend
Revenue was on a nice uptrend starting in 2015. It grew about 5% per year.
In contrast to revenue declines in 2013 and 2014. At that time, revenue was pressured by US government spending reductions. As a result of the Federal government’s budget sequestration.
2020 begins to give us a new revenue picture for Raytheon. Since two-thirds of the year reflect the additional revenues from United Technologies.
Raytheon Technologies Revenue
The new entity, Raytheon Technologies has about $75 billion in annual sales. Triple the size of Raytheon’s stand-alone revenue base.
The revenue breaks out between the major businesses as follows:
Source: Raytheon Technologies Pro Forma
Raytheon Dividend Payout Ratio
Let’s take a look at earnings and cash flow. To see how the Raytheon dividend payout ratio stacks up from these financial metrics.
As a general rule, a lower dividend payout ratio percentage is 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 Dividend Payout Vs. Accounting Earnings
In the past, Raytheon maintained its dividend payout ratio between 30% and 40% of accounting earnings. And closing out 2019, the dividend as a percent of earnings was at the low end of that range.
I do not have much historical financial information about the new company. In order to evaluate the dividend payout ratio.
I do know that the average analyst estimate for 2021 earnings per share is $3.81. 2021 will be the first full year of operation for the combined companies.
And, I know the current dividend payout per share is $1.90. These 2 data points give me a 50% dividend payout ratio for 2021 based on earnings.
Raytheon Dividend Payout Vs. Free Cash Flow
Our dividends are paid in cash from cash flow. What can this metric tell us?
In the years leading up to the merger, Raytheon’s dividend payout ratio based on cash flow was very similar to the percentage of earnings paid out in dividends. About 35%.
I’m going to assume this relationship will hold going forward. And conclude 50% of the cash flow will be paid out to shareholders in the form of dividends.
The return of capital to shareholders and dividend payout ratios need to be monitored going forward. Since we are in the very early stages of learning how Raytheon will operate in these areas.
Raytheon Balance Sheet & Credit Rating
Raytheon has a strong balance sheet. Debt to equity checks in at a very conservative .5 to 1.
S&P provides a credit rating of A-. This is a solid “investment grade-low credit risk” evaluation as shown in the chart below.
The company was targeting an “A” credit rating at the time the merger transaction closed. The current rating represents a slight deterioration, but nothing that concerns me.
The reduced credit rating is likely due to the combined company’s increased debt load. Debt is $34 billion, up from the $5 billion of debt Raytheon held heading into the merger.
Raytheon Stock Valuation
Raytheon’s stock price was on a rapid rise until early 2020. The market valuation of the combined companies dropped 30%+ as compared to when Raytheon operated by itself.
Uncertainties about the merger. And the negative effects on Raytheon’s commercial aerospace business as a result of the health crisis have taken their toll.
With that said, let’s look at the RTX stock value from several different angles. And determine what RTX stock is worth.
Raytheon Dividend Discount Model
I ran a single-stage dividend discount model on Raytheon stock to assess it’s fair value.
Here are the assumptions I used:
- Current annual dividend payment – $1.90 per share
- Projected annual dividend growth – 7%
- My desired annual return on investment – 10%
Based on these assumptions, the single-stage dividend discount model places a fair value on Raytheon stock at $68 per share.
There are limitations of dividend valuation models. So, let’s look at some other methods to determine stock value.
Morningstar Fair Value Estimate For Raytheon Stock
The investment analysis firm Morningstar estimates Raytheon stock to be fairly valued at $78 per share.
I’ve been using Morningstar investment research for more than 15 years. I highly recommend their valuable service.
Raytheon Stock Price to Earnings Ratio
The Raytheon stock price to projected 2021 earnings sits at 16 times. This is not an unreasonable valuation to me.
Is Raytheon Stock A Buy Or Sell?
Based soley on valuation, Raytheon stock appears to be a buy.
Why? Because all 3 of the valuation measures suggest Raytheon stock is modestly undervalued at the time of this writing.
There is so much uncertainty about the future success of the merger. Also, the long term prospects for commercial aerospace are currently in doubt.
Given the circumstances, I feel like the market is in “wait and see” mode regarding Raytheon stock. And this attitude is depressing the price, making Raytheon stock a buy.
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Raytheon Dividend Stock Analysis Conclusions & Wrap Up
Let’s wrap up this Raytheon stock analysis and dividend review with a few concluding thoughts.
My Shares: Is Raytheon Stock A Buy, Sell, Or Hold?
I first invested in Raytheon and built my position during 2011-2012. Back then, the defense industry struggled with uncertainties surrounding U.S. government spending. That uncertainty depressed the Raytheon stock price at the time.
Mainly because of the large stock price appreciation since my purchases, Raytheon holds a mid-size position in my dividend stock portfolio.
Because of the tax implications, I’m not interested in selling at this time. Plus, given the potential business opportunities from the merger and undervalued stock price, I see no reason to.
For my dividend portfolio, I have a firm “hold” signal on the stock. For my own shares.
As An Objective 3rd Party: Is Raytheon Technologies A Good Stock To Buy?
I suggest that Raytheon Technologies is a good stock to buy. Here’s why:
- 3%+ yield for making money now from dividends
- 6-8% projected annual dividend growth
- Shares appear undervalued
- Uncertainties about the merger and commercial aerospace will dissipate in time
- A high dividend defense stock providing diversification benefits
- Significant merger integration savings yet to be realized
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Further Reading About Dividend Stocks
Whether you decide to invest in Raytheon or not, you may like to check out some other dividend stock reviews. Good dividend stocks are often clustered in specific sectors of the stock market.
Since Raytheon is an industrial stock. Here are several reviews targeted at the industrial stock sector.
- Cummins Dividend Stock Analysis
- Emerson Dividend Stock Analysis
- Norfolk Southern Dividend Review
- UPS Dividend Stock Analysis
- Best dividend ETFs for buy & hold investors
My Favorite Dividend Investing Resources
- Trade stocks using the high powered Webull app
- Dividend stock recommendations from Simply Investing
- Investment research from Morningstar
- Motley Fool stock advisor
- Personal Capital for managing your entire financial picture
Disclosure & Disclaimer
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