RBC Capital Markets analyst Robert Stallard downgraded his rating on shares of Raytheon Co. (NYSE:RTN) to "Sector Perform" from "Outperform" with $53 price target, saying the company missed an opportunity to pay a more attractive dividend.
The brokerage maintained its 2012 EPS estimate on shares of Raytheon of $5.04, its 2013 estimate of $5.71 and its 2014 estimate of $5.91.
Raytheon recently raised its quarterly dividend from $0.43 to $0.50 (up 16%), representing an annual dividend of $2.00, and a current yield of 3.8%.
In Stallard's view, Raytheon has missed an opportunity to make a significant increase in its dividend, pushing the yield to the 4%-plus level that would increase its appeal with income investors, a tactic that has worked very successfully for Lockheed Martin Corp. (NYSE:LMT) that yields 4.5%.
Since the start of 2008, Raytheon has averaged $1.7 billion p.a. on buybacks and acquisitions, and the stock is down by 12% (down 10% versus S&P 500), and the analyst doesn't see this changing very much with an unchanged cash deployment strategy.
When Stallard upgraded Raytheon in February 2011, his premise was that Raytheon's exposure to higher growth defense exports would result in a premium valuation versus its defense peers.
However, since that time Raytheon's average forward price-to-earnings of 9.2 times has remained pretty close to the sector average despite international wins. Further export prospects remain, but Stallard believes they are likely to be back end loaded in 2012.
Stallard is disappointed that RTN has not used this recent opportunity to pay a more attractive dividend. With this opportunity missed, he sees limited upside for the stock from here, and hence his downgrade.
Raytheon provides electronics, mission systems integration, and other capabilities in the areas of sensing, effects, and command, control, communications, and intelligence systems, as well as a range of mission support services in the United States and internationally.
RTN is trading down 0.45% at $52.62 on Friday.