General Dynamics (GD): A Strategic Buy Amid Global Defense Spending Surge

The defense sector is a rare oasis of stability in today's volatile markets, fueled by geopolitical tensions, NATO's spending pledges, and the U.S. military's modernization push. Few companies are better positioned to capitalize on this than General Dynamics (GD), which just reported a record $88.7 billion backlog and 13.9% revenue growth in Q1 2025. With its grip on critical programs—from Virginia-class submarines to cybersecurity systems—and a dividend streak unmatched by peers, GD offers a compelling mix of growth and income. Let's dissect why this stock deserves a place in long-term portfolios.

Backlog Strength: The Foundation of Predictable Growth

General Dynamics' $88.7 billion backlog as of Q1 2025 isn't just a number; it's a roadmap to future earnings. This figure includes:
- $17.2 billion in recent Virginia-class submarine contracts, extending revenue visibility through 2035.
- $3.03 billion in Aerospace revenue (up 45% YoY), driven by Gulfstream's G700 and newly certified G800 jets.
- Multiyear IT and cybersecurity contracts from its GDIT division, which reported double-digit revenue growth in Q1.

The backlog is growing faster than revenue: GD's book-to-bill ratio (contracts won vs. revenue recognized) stayed above 1 in 2024, and Q2 2025 wins like the $1.85 billion submarine acceleration deal suggest further expansion. This long-term revenue visibility is a rare luxury in industries prone to cyclicality.

Earnings Momentum: Margins and Dividends Hold Up

GD's Q1 results were a masterclass in execution:
- Revenue hit $12.2 billion, up 13.9% YoY, with all four segments growing.
- EPS surged 27.1% to $3.66, fueled by margin expansion (operating margin rose 70 bps to 10.4%).
- The Aerospace segment's margins jumped 210 bps to 14.3%, reflecting manufacturing efficiencies in aircraft production.

Even better, GD's dividend resilience stands out. The company has increased its dividend for 34 consecutive years, with a 5.6% hike in Q2 to $1.50/share. At a 1.96% yield, it's a steal compared to peers like Lockheed Martin (1.5%) or Northrop Grumman (1.2%). And with free cash flow covering dividends easily (FCF of $3.34 billion in 2024), there's little risk of a cut.

Valuation: Underappreciated at 17.8x Forward P/E

Despite its strong fundamentals, GD trades at a discount to its peers. The stock's forward P/E of 17.8x is well below industry averages (e.g., 22.8x for aerospace/defense peers). This gap exists even though GD's cash flow and backlog growth outpace many rivals.

The catalysts for revaluation are clear:
1. NATO's $300 billion defense spending commitment by 2030 will fuel demand for submarines, fighter jets, and cybersecurity.
2. U.S. defense budgets remain robust, with the Navy's submarine fleet expansion at the core of modernization plans.
3. GD's low sensitivity to trade wars: 93% of revenue comes from U.S. government contracts, shielding it from geopolitical headwinds like tariffs.

Risks? Overblown.

Bearish arguments often cite two risks:
1. Margin pressure: While R&D spending rose to $968 million in 2024 (up from $510 million in 2023), this is an investment in long-term programs like the G800 and submarine tech.
2. Overvaluation if P/E expands: But GD's backlog and earnings growth justify a P/E closer to 20x, which would still leave room for upside.

Investment Thesis: Buy for Growth and Income

General Dynamics is a defensive growth stock with rare characteristics:
- A $90B+ backlog ensures years of predictable cash flows.
- Margin expansion is structural, not cyclical, due to manufacturing scale and high-margin aerospace/cybersecurity work.
- 34 years of dividend growth is a testament to management's capital discipline.

With the stock trading at $263 (as of late 2024 data) and a forward P/E of 17.8x, GD is attractively priced. The July 23 earnings report will likely boost confidence, as Q2 results should highlight further backlog wins and margin strength.

Recommendation: Buy GD for a portfolio allocation of 2-3%. Set a price target of $300+ by 2026, driven by backlog conversion and multiple expansion. The 1.96% dividend yield sweetens the deal, making this a rare “buy and hold” candidate in a volatile market.

In a world where defense spending is the new infrastructure, General Dynamics isn't just a shipbuilder—it's a blue-chip growth stock with a moat. Don't miss the boat.