Aerospace and defense giant RTX (RTX -0.28%) has a sustainable dividend and plenty of potential to increase it. The company offers exposure to the cyclical aerospace sector alongside the stability of the defense sector. It's a compelling mix because each side of the business can support the other when it needs cash flow to support investments in long-term growth.
RTX's sustainable dividend
In a display of confidence in its long-term prospects, management raised its quarterly dividend from $0.63 per share to $0.59 per share in early May. Annualizing that dividend means a yearly dividend of $2.52 per share. Meanwhile, management's full-year guidance calls for $5.35-$5.45. As such, RTX plans to pay out about 47% of its earnings in dividends in 2024.
Dividend in terms of cash flow
Free cash flow (FCF) also accounts for capital investment and represents the flow of cash available to make share buybacks and dividends. It's probably a better way to look at dividend cover. Still, here again, RTX looks to have a well-covered dividend.
Management expects $4.7 billion in FCF in 2024. Using the $2.52 per share dividend and the $1.33 billion share count at the end of the second quarter, the annual dividend will cost about $3.56 billion in cash. This implies an FCF payout of 76%.
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While that figure appears high, Wall Street analysts predict FCF of $7 billion in 2025 as the company works through the cash-draining impact of removing and inspecting aircraft engines to ensure there are no issues with potential contamination of powder coating in turbine discs.
Either way, RTX's dividend is safe and likely to grow in line with management's plan to return $36 billion to $37 billion to shareholders through 2025 from the merger in 2020.
