Summary
- Raytheon Technologies had a rather good first quarter despite the ongoing COVID-19 headwinds.
- The company benefits from a large defense exposure, which supports sales and dividend payments.
- While this market does not offer an easy ride up right now, I believe adding at current levels is a great long-term investment.
After taking a break from covering dividend stocks, I believe it's time to discuss one of my favorite aerospace companies. The Raytheon Technologies Corporation (RTX) is the result of the merger between Raytheon and United Technologies. The Waltham MA-based producer of aerospace products pays a good dividend, has solid financials and sales that are not entirely dependent on commercial aviation thanks to its military exposure. While aerospace companies, in general, are very volatile right now, I believe Raytheon Technologies has the potential to be a long-term provider of dividends and capital gains.
Source: Raytheon Technologies
What's Raytheon Technologies?
Raytheon Technologies (hereafter referred to as Raytheon) is a $90 billion market cap aerospace & defense company located in Waltham MA. Raytheon is the third-largest listed defense company behind Lockheed Martin (LMT) and Boeing (BA). In June 2019, United Technologies announced its intention to with the defense-focused Raytheon Company. While United Technology was the nominal survivor, they still moved their HQ to Massachusetts were Raytheon is based. In April of 2020, the merger was completed.
While the former Raytheon company generated almost all of its sales in defense markets, the post-merger Raytheon has a broad, but powerful aerospace portfolio. The company owns Collins Aerospace, a company focussed on providing a wide variety of aerospace supplies ranging from cabin components to exterior products. This division generates 75% of its sales in the commercial aviation industry, with 40% of its sales coming from aftermarket products. In addition to Collins, Ratheon owns Pratt & Whitney, a company known for its advanced engines, services both commercial and defense markets. While both of these divisions were formerly owned by United Technologies, the former Raytheon company added its Raytheon intelligence and space division, as well as its missile and defense division known for products like the Tomahawk missile.
With all of this in mind, what matters most is the company's sales breakdown. All segments/divisions included, and according to the sales slit for 2019, Raytheon generates 55% of its sales in defense markets. 45% of sales are generated in commercial markets. 52% of sales are domestic, with 48% of sales being generated outside of the United States. And as the former Raytheon company was mainly defense focussed, only 25% of the company's defense backlog comes from the Collins and Pratt & Whitney divisions.
A Strong Product Portfolio Generates Stability
One major benefit of being a renowned defense contractor is to be able to benefit from an anti-cyclical end market. As the graph below shows, government spending in national defense tends to rise during every recession and often stay high after a recession to further stimulate employment. Strengthening one's defense capabilities is never a bad idea (in my opinion), if you can do it while stabilizing the aerospace and defense supply chain you gain an even greater benefit. Note that the aerospace and defense industry was directly responsible for 1.8% of GDP with 10 jobs in this industry generating 19 supply chain jobs. In other words, defense spending is a great tool to generate employment and to strengthen demand if consumption and corporate investments are down.
Interestingly enough, while commercial aerospace has been one of the biggest success stories of the modern industrialized world, it is now the factor weighting on Raytheon's sales. Below is a graph that shows PAX (persons approximately) expectations (pre-COVID-19). Even the bear case of increased protectionism would have resulted in a steady increase. While COVID-19 sure did a number on the short-term results as airlines all over the world were unable to fly, I expect that the longer-term trend will be up without a doubt. However, it is likely that normalization will only be achieved in the second half of 2021 as long as COVID-19 is not contained.
