General Dynamics Delivers a Moaty and Differentiated 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 usually see room for outsize growth in this industry. Defense budgets usually ebb and flow with a nation's wealth and its perception of geopolitical danger. In the US, both have been on the rise, and among many allies, notably NATO and Japan, geopolitics is leading to larger military budgets than we've seen for decades. We estimate that the portions of the US defense budget relevant to contractors like General Dynamics and its competitors and subcontractors shrank between 2011-16 by 3.7% annualized, while these budgets grew between 2017-24 by 5.8% annualized. We think the contractors' budget will continue to grow with modernization and robust demand from the Trump administration in the near term but should moderate to around 2.5%-3.0% growth over the long term.