RTX Has Doubled Free Cash Flow. The Market Is Still Pricing the GTF Crisis.

The simple read on RTX's 2025 free cash flow jump is that the GTF customer compensation cash outflow is in the process of normalising. That is partly true. But the deeper driver is the Raytheon Defense backlog conversion, which has been accelerating through 2024 and 2025 as the Javelin, Stinger, and Patriot production lines have ramped to meet allied re-stocking demand after the Ukraine draw-down.

The Pratt & Whitney Talon Blue autonomous wingman contract announced earlier this week is a proof point. The engine selection for the Northrop Grumman YFQ-48A puts Pratt on the propulsion path for the entire autonomous combat aircraft generation. That is a multi-decade revenue stream the stock is not yet pricing. Historically, propulsion wins on next-generation defence platforms have been worth 15-25x the initial engine contract value over the full program life. The F-35 F135 engine is the textbook reference.

RTX has also exited the commercial aerospace distress phase. Collins Aerospace margins are back above the 2019 pre-pandemic level. The aftermarket mix, which carries operating margins in the high 20s, is the highest-quality part of the aerospace franchise, and it has been compounding at mid-teens revenue growth. The market is valuing Collins inside RTX at roughly 10x EBITDA, versus standalone aerospace peers at 13-15x. Further rationale for the re-rating.

The third component is the missile portfolio. Raytheon Missiles & Defense is running at record book-to-bill. The US Army's Patriot PAC-3 production is scaling, the Iranian tensions have triggered additional Gulf Cooperation Council orders, and European air defence is being rearmed at pace. The order book visibility here is the longest and stickiest revenue in the RTX portfolio.

Across three complete defence spending cycles, the pattern has held: the FCF inflection comes in the second and third year after a production capex build, not at the top of the capex line. RTX is now entering that FCF leverage window.

RTX carries $39.5 billion of debt against $7.4 billion of cash. Net debt to EBITDA is roughly 2.8x, which is elevated for an industrial but manageable given the FCF generation. The refinancing schedule is well-laddered, and the investment-grade rating has been affirmed. Importantly, the free cash flow profile now supports net leverage declining by 0.5x per year, which would push the ratio to the low 2s by 2027.

Dividend coverage is excellent. The $1.35% yield at current price translates to roughly $3.4 billion of annual dividends, against $7.9 billion of FCF. That is 43% dividend coverage, leaving $4.5 billion of capacity for buybacks and debt paydown. The 2025 buyback absorbed about $2.2 billion; 2026 should exceed $3 billion on the guided run rate.

PEG of 2.78 sounds elevated. Strip out the 2023 GTF anomaly and the underlying earnings growth rate is closer to 12-14% per year. On that normalised base, PEG drops to roughly 2.2, in line with the sector.