For my second purchase today I bought shares of General Dynamics (GD), a company that is the fifth largest defense contractor in the world. GD has four main business groups: Aerospace (e.g., Gulfstream business jets), Combat Systems (e.g., Abrams tanks), Marine Systems (e.g., submarines), and Information Systems and Technology (e.g., thermal cameras and satellite components). Although defense stocks in general have been beaten down due to concerns about U.S. government spending cuts, I think GD is sufficiently diversified to cope with some reduced spending.
GD is a good dividend-growth stock. The company has increased its dividend for 20 consecutive years, which I think is the longest streak among companies in the defense industry. The 5-year average annual dividend growth rate is 15.5% and the most recent increase was 11.9% in April 2011. With a payout ratio of only 26% and relatively low debt, the dividend appears to be sustainable even in the event of short-term earnings fluctuations.
In terms of valuation, GD has a P/E (ttm) of 9.73, P/S (ttm) of 0.78, P/B of 1.84, and PEG of 1.24. These numbers suggest that the stock is undervalued, so I decided to start a position.
I bought 20 shares of GD at the price of $69.60 per share, giving me a 2.70% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $9.40, which would add a total of $37.60 to my annual dividend income.
To demonstrate the foibles of trying to time the market, I was watching GD back in mid-December when it was trading at around $63. However, instead of buying it at that time, I kept waiting to see whether it would go down more so I could get a better entry price. It did not dawn on me until later that $63 was already a great price and I was being too greedy. Of course, over the next month and a half the price went up to over $72 and I was kicking myself. I am slowly realizing that when a stock I want is trading at a price that I deem to be "good enough" I just need to pull the trigger instead of waiting to see whether it goes down further -- because it might not go down in the near future. Thus, when GD dipped back below $70 today, I decided to buy it. It may go down further -- maybe even to $63 -- and if it does, then I will simply buy more shares and average down. I consider this experience to be another part of the learning process in becoming a better investor.