Raytheon Technologies (RTX): A Dividend Champion with Backlog-Backed Growth Potential

Raytheon Technologies (RTX) has long been a stalwart in the aerospace and defense sector, and its recent 7.9% dividend hike to $0.68 per quarter underscores its commitment to rewarding shareholders. With an 89-year dividend track record and a current yield of 1.9%, RTX offers income investors a compelling combination of stability and growth potential. Let's dissect the sustainability of this payout and explore why RTX could be a top pick for portfolios seeking both dividends and capital appreciation.

Dividend Sustainability: A Strong Foundation

RTX's dividend payout ratio—calculated as annual dividends divided by earnings—stands at just 47%, based on its 2024 adjusted EPS of $5.73. This leaves ample room for future increases while maintaining financial flexibility. A payout ratio below 60% is generally considered sustainable, and RTX's ratio is comfortably within this range. The dividend increase to $0.68 per quarter (from $0.63 previously) reflects confidence in its cash flow generation, which is critical for sustaining payouts.

Cash Flow Stability: Backlog-Driven Resilience

RTX's dividend strength hinges on its robust cash flow and order backlog. Despite a 9% dip in 2024 operating cash flow to $7.2 billion (from $7.9 billion in 2023), the company projects 2025 free cash flow of $7.0–$7.5 billion, a significant improvement over 2024's $4.5 billion. This rebound is underpinned by a staggering $218 billion backlog as of year-end 2024—$125 billion in commercial aviation and $93 billion in defense.

The backlog acts as a “cash runway,” ensuring steady revenue conversion over the next several years. Defense programs like the F-35 fighter jet (see image below) and commercial aircraft components provide long-term demand stability, shielding RTX from cyclical downturns.

Segment Performance: Diversification as a Strength

RTX's three segments—Collins Aerospace, Pratt & Whitney, and Raytheon—each contributed to its 2024 success:
- Collins Aerospace grew sales 8% organically, driven by defense and commercial aftermarket demand.
- Pratt & Whitney surged 18% in sales, fueled by commercial engine deliveries and military programs.
- Raytheon increased sales 2%, benefiting from land and air defense system orders.

This diversification reduces reliance on any single market, enhancing cash flow predictability.

2025 Outlook: Growth and Margin Expansion

RTX's 2025 guidance is bullish:
- Adjusted EPS of $6.00–$6.15, a 5–7% increase from 2024.
- Organic sales growth of 4–6%, supported by the backlog and new program wins.

Management also aims to expand margins across all segments, which could further boost free cash flow. With $3.7 billion returned to shareholders in 2024 (via dividends and buybacks), the company has shown discipline in balancing payout growth with capital reinvestment.

Investment Thesis: Total Return Potential

While RTX's 1.9% yield may not excite high-yield hunters, its combination of dividend growth and capital appreciation makes it a standout for total return investors. The stock has outperformed the S&P 500 over the past three years, and its backlog-driven model positions it to capitalize on secular trends like global defense spending and commercial aviation recovery.

Risks to Consider

• Geopolitical tensions: Defense budgets could fluctuate with global conflicts.
• Supply chain disruptions: Delays in component production could pressure margins.
• Cash flow execution: Achieving the $7.0–$7.5 billion free cash flow target is critical for sustaining dividends.

Conclusion: A Compelling Hold/Buy for Income Investors

RTX's dividend hike and strong backlog position it as a reliable income generator with growth embedded in its financials. A payout ratio under 50%, coupled with a $218 billion backlog and 2025 margin expansion plans, suggests this dividend is here to stay. For investors prioritizing consistency and capital appreciation, RTX offers a rare blend of income and growth—making it a compelling buy or hold, especially at current valuations.

In a world where stability and growth are hard to find, RTX's 89-year dividend legacy and backlog-driven cash flow are worth betting on.