This Cheap Dividend Growth Stock Is A “Strong Buy” Right Now

I want to tell you about a high-quality stock that pays big, growing, reliable dividends. These growing dividends are funded by growing profit because this business is providing critical sovereign defense products and services. Is this one of the top stocks to buy now?

General Dynamics Corporation (GD) is a global aerospace and defense company. Founded in 1899, General Dynamics is now a ~$51 billion (by market cap) company that employs over 100,000 people globally. Some of their major platforms include the Stryker combat vehicle, Abrams tank, the Virginia-class nuclear-powered submarine, and Gulfstream business jet. In addition, they offer a suite of IT services.

Investing in a defense business doesn't require taking a big leap of faith. One must simply believe that sovereign entities will want to continue protecting their interests. Unfortunately, part of the human condition is human conflict. This is reality. And companies that provide the very best defense capabilities will continue to thrive because of our reality. An industry oligopoly only serves to strengthen that thesis.

All of this bodes incredibly well for the company's future profit growth and dividend growth. Speaking of that dividend growth, the company has increased its dividend for 30 consecutive years. Their last dividend increase, announced only weeks ago, was over 8% - during a very difficult period for aerospace. Talk about reliability. This increase isn't that far off from the stock's 10-year dividend growth rate of 10.2%.

Considering that the stock yields 2.7%, this is a very nice combination of yield and growth. This yield, by the way, is 50 basis points higher than the stock's own five-year average yield. This attractive, growing dividend is also safe. The payout ratio is only 43.3%.

I view the "sweet spot" for a dividend growth stock to be a yield of between 2.5% and 3.5%, paired with a mid-single-digit (or better) dividend growth rate. And this stock is squarely in that zone.

I valued shares using a dividend discount model analysis. I factored in a 10% discount rate and a long-term dividend growth rate of 7.5%. This is not an overly enthusiastic dividend growth rate when compared to the stock's 10-year dividend growth rate. It's also below the most recent dividend increase, which came in during a pandemic.

With a low payout ratio and a Earnings Per Share forecast in the low-double-digit range, I think General Dynamics can easily clear this hurdle.

Morningstar rates GD as a 3-star stock, with a fair value estimate of $182.00.

CFRA rates GD as a 5-star "STRONG BUY", with a 12-month target price of $203.00.

I came within pennies of where CFRA is at. Averaging the three numbers out gives us a final valuation of $196.56, which would indicate the stock is possibly 12% undervalued.

Here's the bottom line, guys: General Dynamics Corporation is a fantastic business operating within an industry that benefits from an oligopoly. Their record-high backlog, unique industry position, and post-pandemic recovery sets them up for plenty of growth moving forward. With a market-beating dividend, a low payout ratio, double-digit long-term dividend growth, 30 consecutive years of dividend raises, and the potential that shares are 12% undervalued, dividend growth investors are advised to take a close look at this stock right now.

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