General Dynamics Presides Over a Moaty and Diversified Portfolio of Aerospace and Defense Programs

Regulated margins, mature markets, customer-paid research and development, and long-term revenue visibility allow defense contractors to deliver a lot of cash to shareholders, which we view positively because we don’t see substantial growth in this industry. Indeed, defense budgets usually ebb and flow with a nation's wealth and its perception of danger. In the U.S., both have been on the rise, and among many allies, notably Germany and Japan, geopolitics is leading to larger military budgets than we've seen for decades. For perspective, we estimate that the portions of the U.S. defense budget relevant to contractors like General Dynamics and its competitors and subcontractors shrank between 2012 and 2017 by 2.6% annualized while these budgets grew between 2018 and 2023 by 6.5% annualized. We think the contractors' budget will continue to grow with modernization, but more moderately, averaging around 2.5%-3.0% over the next five years.