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.
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
Certainly, I will have some thoughts on the Raytheon dividend yield, Raytheon dividend growth, safety, and much more.
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.
Raytheon Technologies Stock & Dividend Review: Key Takeaways
There are a number of things to like about Raytheon stock. Specifically:
- 2+% dividend yield for making money now from dividends
- 6-8% projected annual dividend growth
- Uncertainties about the recent merger and the future of commercial aerospace will dissipate in time
- Significant merger integration savings yet to be fully realized
- A high dividend defense stock providing diversification benefits versus other dividend rich stock sectors
Now, for all of the details…
Raytheon Company Background
The company has gone through substantial changes. Let’s get a handle on the past. To understand the present.
Raytheon was an international company operating in the aerospace and defense sector. They are headquartered in Waltham, Massachusetts. And, Raytheon stock is 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
Understanding dividends from this company is more complex than for the average dividend growth stock. Let me explain.
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.
The initial dividend rate answered the important question I just raised. Specifically, Raytheon’s new dividend was 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. To compound shareholder’s dividend income. And a substantial increase at that. More than 18%!
Raytheon Dividend Per Share
As of this update, the company has further increased its dividend. Now, Raytheon pays an annual forward dividend of $2.04 per share.
Raytheon Dividend Yield
As a result, this gives us a 2.3% Raytheon dividend yield at the recent Raytheon stock price.
This is a good dividend yield from my perspective. But, regular readers know I target dividend yields between 3%-5% when selecting dividend stocks.
Also, Raytheon’s stock price fell in 2020. 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 well below my target.
On the other hand, how I justified owning the stock of Raytheon, at a low dividend yield was 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 this dividend review portion of the stock deep dive.
How Often Does Raytheon Pay Dividends?
Raytheon pays dividends every 3 months or 4 times per year. Each quarterly dividend payment is one-fourth of the annual dividend rate.
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. The company now pays dividends in March, June, September, and December.
Raytheon Ex-Dividend Date
To receive the next Raytheon stock dividend payout, you must complete your purchase before 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 in which 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 annual dividend increase streak started in 2005.
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
The table below shows that past dividend growth has been outstanding.
We are clearly making some good money off dividends from this stock. At least according to the dividend growth rate from recent years.
Table 1: RTN/RTX Compound Annual Dividend Growth Rate
|1 Year||3 Years||5 Years||7 Years|
In my opinion, Raytheon had strong dividend growth before the merger. It averaged about 8-9% per year. And it has maintained that performance 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 a strong 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 providing shareholders with cash from regular dividend payments and repurchases of RTX stock in the open market.
Management stated at the time, that the newly combined company would return $18-$20 billion to shareholders in the first 3 years after the merger.
I noticed later they pushed this target from 3 years to 4. Not surprising given the negative events impacting global commercial aviation. Which is a big part of Raytheon’s business.
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 is nearly 3 times its former size. So, nearly tripling its return of capital to shareholders sounds good.
Moving on now. 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 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.
Chart 1: Raytheon 7-Year Revenue Trend
2020 has given us a new revenue picture for Raytheon. Since two-thirds of the year reflect the additional revenues from the United Technologies merger.
The new entity, Raytheon Technologies, had nearly $60 billion in annual sales. The revenue breaks out between the major businesses as shown in the chart below.
Chart 2: Raytheon Revenue By Business Segment
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
Pre-merger, 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.
But, I do know that the company estimate for 2021 adjusted earnings per share. And, I know the current dividend payout per share.
These 2 data points give me a ~55% dividend payout ratio for 2021 based on estimated adjusted 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 55% of the cash flow will be paid out to shareholders in the form of dividends.
My speculation looks about right given the size of the last quarter’s dividend payments. And the company’s 2021 projection for free cash flow.
To sum up, the dividend payout ratios are between 50% and 60%. This is okay for an industrial company, in my opinion. It balances dividend rewards to shareholders versus dividend safety.
Raytheon Balance Sheet & Credit Rating
Raytheon has a strong balance sheet. Debt to equity checks in at less than .5 to 1.
S&P provides a credit rating of A-. Moody’s score is Baa1. This is a solid “investment grade-low to moderate 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 more than $3 billion, up from the $5 billion of debt Raytheon held heading into the merger.
Raytheon Dividend Safety
I make a judgment about dividend safety for all of my dividend stocks no matter what sector of the stock market they operate in. I look at many of the factors discussed in this article. Specifically:
- Business fundamentals
- Dividend yield
- The company’s history of continuous dividend payments
- Dividend growth
- Debt levels and credit ratings
- Dividend payout ratios
Based on these metrics and measures, I judge Raytheon’s dividend to be safe. And when I speak of dividend safety. I mean a dividend that appears to be safe from a reduction for the foreseeable future.
Next, let’s look at stock valuation. Then, wrap this article up.
Raytheon Stock Valuation
Raytheon’s stock price was on a rapid rise until early 2020. The market valuation of the combined companies dropped significantly 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. To determine what RTX stock is worth.
Raytheon Dividend Discount Model
I ran a single-stage dividend discount model on Raytheon stock to assess its fair value.
Here are the assumptions I used:
- The current annual dividend payment
- Projected annual dividend growth
- 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 $73 per share.
But there are limitations of dividend valuation models. So, let’s look at another source for value.
Morningstar Fair Value Estimate For Raytheon Stock
The investment analysis firm Morningstar estimates Raytheon stock to be fairly valued at $81 per share.
I’ve been using Morningstar investment research for more than 15 years. I highly recommend their valuable service.
Is Raytheon Stock A Buy Or Sell?
Based solely on these valuation measures, Raytheon’s stock appears to be slightly overvalued.
Especially with so much uncertainty about the future success of the merger. Also, prospects for commercial aerospace are still recovering from the significant drop in travel.
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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 Raytheon’s stock price at the time.
Mainly because of the large stock price appreciation since my purchases, Raytheon stock has a mid-size position in my 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 would only add to my shares at $80 per share or less.
Further Reading About Dividend Stocks
Whether you decide to invest in Raytheon or not, you may like to check out some of our 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: I am not a licensed investment adviser, financial adviser, or tax professional. And I am not providing you with individual investment advice, financial guidance, or tax counsel. Furthermore, this website’s only purpose is information & entertainment. And we are not liable for any losses suffered by any party because of information published on this blog.