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Raytheon Company (NYSE:RTN): What’s In It For The Shareholders?

Raytheon Company (NYSE:RTN) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. Today we will examine RTN’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.

See our latest analysis for Raytheon

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What is Raytheon’s cash yield?

Raytheon generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.

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I will be analysing Raytheon’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.

Free Cash Flow = Operating Cash Flows – Net Capital Expenditure

Free Cash Flow Yield = Free Cash Flow / Enterprise Value

where Enterprise Value = Market Capitalisation + Net Debt

Raytheon’s yield of 4.75% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Raytheon but are not being adequately rewarded for doing so.

NYSE:RTN Net Worth January 22nd 19
NYSE:RTN Net Worth January 22nd 19

What’s the cash flow outlook for Raytheon?

Does RTN’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 77%, ramping up from its current levels of US$2.6b to US$4.6b in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, RTN’s operating cash flow growth is expected to decline from a rate of 42% in the upcoming year, to 7.1% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.

Next Steps:

Given a low free cash flow yield, on the basis of cash, Raytheon becomes a less appealing investment. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Raytheon to get a more holistic view of the company by looking at:

  1. Valuation: What is RTN worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether RTN is currently mispriced by the market.

  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Raytheon’s board and the CEO’s back ground.

  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.