Investors tend to prefer “pure-play” firms as they are perceived to be easier to analyze than companies with many businesses. This firm is a good example due to its merger with a rival, followed by a spinoff that allowed it to focus solely on its aerospace operations.
The new firm has an attractive balance of commercial and military aerospace businesses, which helps cut risk. Savings from the merger also allow it to reward investors with dividend hikes and share buybacks.
Meanwhile the stock trades at 17.9 times the company’s 2022 earnings forecast.
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RAYTHEON TECHNOLOGIES CORP. (New York symbol RTX; www.rtx.com) took its current form on April 3, 2020, with the merger of United Technologies Corp. (old symbol UTX) and Raytheon Co. (old symbol RTN). It’s now a leading maker of commercial aircraft equipment, electronic systems for military aircraft and radar systems, and guided missiles.
The remaining firm has four main divisions: Collins Aerospace makes aircraft control systems, navigation equipment and cabin interiors (27% of 2021 revenue, 29% of earnings); Pratt & Whitney makes jet engines (27%, 8%); Raytheon Missiles & Defense makes land and sea-based missile defence and radar systems (23%, 30%); and Raytheon Intelligence & Space specializes in communications equipment and satellites for government intelligence agencies and corporate clients (23%, 33%).
The U.S. government is the new company’s biggest customer, accounting for 48% of its revenue in 2021. Sales to foreign military customers (through the U.S. government) supplied an additional 9%.
Due to shortages of certain components and labour, Raytheon has had to delay planned deliveries of Pratt & Whitney jet engines to aircraft makers Boeing and Airbus. It expects to deliver most of the engines by the end of 2022 but will have to postpone some to the first quarter of 2023.
Separately, a change in how companies account for their research costs has prompted Raytheon to cut its free cash flow (regular cash flow less capital expenditures) forecast for all of 2022 to $4 billion from its earlier prediction of $6 billion. The company earmarks about 4% of its revenue to research.
Growth Stocks: Revenue and cash flow should keep rising
However, Raytheon still expects its full-year revenue to improve about 6% to between $67.75 billion and $68.75 billion. It also stands by its 2022 earnings forecast of $4.60 to $4.80 a share. The stock trades at a reasonable 17.9 times the midpoint of that range.
The company’s revenue in the quarter ended June 30, 2022, rose 2.7%, to $16.31 billion from $15.88 billion a year earlier. If you adjust for businesses that Raytheon recently sold, sales improved 4% on stronger sales to commercial aircraft makers. Earnings rose 10.0%, to $1.72 billion from $1.57 billion. Due to fewer shares outstanding, earnings per share gained 12.6%, to $1.16 from $1.03.
Raytheon received $2.4 billion on new orders in the quarter. Its total backlog was $161 billion (40% military, 60% civilian) as of June 30, 2022. That’s up from $156 billion at the end of 2021.
The company expects free cash flow (regular cash flow less maintenance capital expenses) to rise 20% to $6.0 billion in 2022.
With the June 2022 payment, Raytheon raised your quarterly dividend by 7.8%, to $0.55 a share from $0.51. The new annual rate of $2.20 a share yields 2.6%.
The company’s TSI Dividend Sustainability Rating is Above Average.
Recommendation in Dividend Advisor: Raytheon Technologies Corp. is a buy.