- Raytheon Technologies Corp. (NYSE:RTX) typically raises its dividend every four quarters and it’s been 4 quarters
- The next payment announcement will be made at the end of April, so investors can probably expect another 6-7% hike
- Raytheon has forecast 20% growth in free cash flow (FCF) from $5 billion to $6 billion in 2022, so it can afford the hike
Raytheon has been on a roll. RTX stock is now up 18.2% from $86.06 on Dec. 31 to $101.71 as of March 24, 2022. After all, this is a major defense company and there is now a significant war going on in Europe. To put it bluntly, war is good for defense stocks, even though that is not very compassionate for those who are suffering from it.
Moreover, it looks like the stock could move significantly higher from here, even if the war subsides or peace comes about. Let’s look at the reasons.
| RTX | Raytheon Technologies Corp. | $102.81 |
Why Raytheon Stock Could Move Higher
There are essentially two reasons. First, Raytheon is due to raise its quarterly dividend by the end of April.
And second, the company has initiated another very large buyback program, which will significantly reduce its share balance. Both of these actions will act as a catalyst.
First, let’s look at the dividend. The company has paid out four quarters of dividends at the 51 cents per share level. That is usually when it then raises the dividend per share (DPS). The next payment announcement date is likely to occur around April 26 or so.
Last year it hiked the DPS from 47.25 cents to 51 cents, or annually from $1.89 to $2.04. That is a 7.3% raise. If it were to do so at this rate again, the DPS would likely be around $2.19 per share.
At March 24’s price of $101.71, that would give RTX stock a new dividend yield of 2.15%. Morningstar shows that in 2019, prior to the Covid-19 effect on stock prices, the average dividend yield was 1.96%.
So, if we divide $2.19 by 1.96%, the average target price for RTX stock would be $111.73 per share. That is 9.9% over today’s stock price.
How Buybacks Could Help
On Dec. 7, Raytheon’s board of directors increased its buyback authorization to $6 billion. Exactly a year earlier, on Dec. 7, 2020, the company had authorized a $5 billion share repurchase program.
Then, on Jan. 25, Raytheon announced its earnings for the year and told investors that it had repurchased $2.3 billion of RTX shares during the year, including $327 million worth during Q4.
In fact, on page 55 of the company’s 10-K filing, Raytheon reported that it had bought back 28.003 million shares during the year. It also said the company had $6.0 billion in authorization remaining to buy back shares as of the end of the year. In 2020 the company did not buy back any significant amount of shares.
Since there were 1.519 billion shares outstanding at the end of 2020, that means that the company bought back about 1.8% of shares outstanding. This is its historical buyback yield.
Therefore the sum of these two will be a 2.15% dividend yield plus a 1.8% buyback yield, or a total yield of 3.95%, almost 4.0%.
How Buybacks Will Hike DPS and the RTX Stock Price
If the company were to buy back about 42% of the buyback authorization, or $2.5 billion, during 2022, that would amount to 1.65% of its $151 billion market capitalization as of March 24. This is its forward buyback yield.
Therefore, say over three years, the same dividend payment would amount to a higher DPS, since there would be roughly 5% fewer shares (assuming the price did not rise). So, given that the dividend payment would cost $3.27 billion (i.e., $2.19 DPS x 1.493 billion shares outstanding on Dec. 31), having 5% fewer shares would increase the DPS next year to $2.305.
That can be seen by dividing $3.27 billion by 1.41835 billion shares (i.e., 5% fewer shares than during 2021). The result of $2.305 DPS is actually 5.25% higher than the prior year, without any additional cost to the company.
Bottom Line: RTX Stock Is Likely to Keep Rising
Hopefully, you were able to follow this math. It shows that the huge new buybacks and the upcoming dividend increase are likely to pull RTX stock significantly higher.
Value investors can expect to see the stock about 10% higher at $111.73 sometime within the next year. That will be due to an expected dividend hike and the effect of lower shares outstanding from buybacks.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
