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Defense behemoth General Dynamics Corp. (GD - Analyst Report) boosted its quarterly dividend by 10.7%, marking the 17th consecutive increase. The company has increased the quarterly dividend to 62 cents per share from 56 cents per share, bringing the annualized payout to $2.48 per share. This comes to a healthy dividend yield of 2.22% based on yesterday’s closing price of $111.84. The increased dividend will be paid on May 9, 2014, to shareholders of record on Apr 11.

A steady dividend payout policy primarily reflects General Dynamics’ robust financial position and healthy cash flow generating capabilities. In addition, decent dividend increases at periodic intervals have been one of the most attractive features, providing risk-adjusted returns to its stockholders. The latest rise comes almost after a year of its prior dividend increase declared on Mar 2013, when it was raised by 10% to 56 cents.

With approximately $2.7 billion of free cash flow exiting 2013, General Dynamics’ solid financial position well cushions the payout. At the end of the fourth quarter 2013, its cash and cash equivalents stood at $5.3 billion, reflecting an increase of almost 61.0% from year-end 2012.

This strategic decision to enhance the dividend payout comes on the heels of better-than-expected full year 2013 results. Although its fourth quarter 2013 earnings were in line with the Zacks Consensus Estimate, the bottom line jumped 26.6% from the year-ago figure.

Consistent contract wins and a stable fourth quarter performance were also reflected in its traded price. General Dynamics’ share price closed at $111.84 on Mar 5, reflecting a gain of 18.7% so far this year. Dividend hikes not only augment shareholders’ return but also lift the market value of the stock.

Again, the recent $1.1 trillion Omnibus bill came as a sign of relief for the defense companies like General Dynamics. The bill provides Pentagon with nearly $93 billion to buy weapons and another $63 billion for research and development.

Having said that, the defense sector will still continue to face headwinds as Pentagon’s spending moderates from historical levels. The preeminent defense stocks will however keep their momentum intact by taking good care of their shareholders for years to come. Despite the risk of defense budget cuts, we believe its varied product offerings will provide General Dynamics with a cushion against any loss in contracts.

General Dynamics currently has a Zacks Rank #3 (Hold). Other heavyweights in the industry include Huntington Ingalls Industries, Inc. (HII - Snapshot Report), Embraer SA (ERJ - Analyst Report) and Lockheed Martin Corporation (LMT - Analyst Report). While Huntington Ingalls carries a Zacks Rank #1 (Strong Buy), Embraer and Lockheed hold a Zacks Rank #2 (Buy).

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