Free cash flow jumped from $4.5 billion in 2024 to $7.9 billion in 2025, a 75% lift, while RTX trades at a forward P/E of 29.2x anchored on GTF headlines that should have cleared from the narrative six months ago. The repricing is overdue.
RTX finished 2025 with $7.94 billion of free cash flow. That is up from $4.53 billion in 2024, a 75% year-on-year lift. The company trades at roughly $190 per share, a forward P/E of 29.2x, and a free cash flow yield of 3.0%. The consensus narrative is still anchored on the Pratt & Whitney geared turbofan powder-metal contamination issue that caused the 2023 earnings collapse.
That narrative is stale. The GTF charges have been taken. The fleet management programme is through the worst of the shop visit cadence. And the capital return to shareholders is now the story. Management has communicated roughly $35-37 billion of cumulative capital return through 2025-2028. At the current market cap of $264 billion, that is 13-14% of the cap returned in four years, mostly through buybacks and a rising dividend.
The defence budget tailwind is the kicker, not the thesis. Even on static budget assumptions, RTX's aftermarket services line and the Raytheon missile portfolio should generate 7-9% revenue growth through 2027. That is before the Iran-driven budget acceleration that the April 17 news flow began to price in. Our view: fair value is $225-240, against a current price near $190 and a consensus target of $215.66. Buyers below $195.
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.
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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.
The GTF programme is not fully behind RTX. There is residual shop visit cadence through 2027, and any further contamination events would reopen the compensation provision. Our assessment, based on the disclosed Q4 2025 commentary, is that the residual financial exposure is capped in the $1-2 billion range. That is not a thesis-breaking number against $8 billion of FCF. But it is a known unknown.
The second risk is defence budget rotation. If the Iran tensions cool materially, the near-term order catalyst weakens. Our base case assumes no incremental budget bump, so this risk is already accounted for. Finally, large programme execution at Lockheed, Boeing, or Northrop can cascade into RTX's subcomponent lines if schedules slip. We see this as a 5-10% earnings risk, not a structural issue.
The RTX thesis is not subtle. Free cash flow has doubled. The defence backlog is at a record. The GTF headline risk is receding. Capital return to shareholders is accelerating. The stock trades at a high-20s forward P/E against a mid-teens earnings growth outlook. That multiple is not punishing. It is simply not pricing the FCF run-rate.
Fair value on our model sits at $225-240, representing 18-26% upside from current levels. The Q1 earnings print on 21 April is the next catalyst; management should confirm the dividend policy and the buyback cadence. If the Pratt & Whitney commentary flags continued stabilisation, the stock should close the gap to the consensus target quickly.
We are buyers below $195. We are patient to $230. The consensus has been anchored on the GTF story for too long. The cash flow has already moved on.
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The Trump administration's $175B Golden Dome missile-shield programme has lifted RTX into the centre of the next defence capex super-cycle. The capital allocation playbook is already shifting in response.
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