When the economy and market go south, many investors start buying Dividend growth stocks. They have long been considered Defense position in turbulent times. Given the defensive stance of these investors, one might wonder what about some real defense stocks, like in the aerospace and defense industries.
With a steady flow of government money, defense stocks have long been considered a safe haven when the economy slows and the market starts to stutter. Given that so many countries around the world, including the US, are facing huge budget deficits, many politicians are looking for significant spending cuts on defense spending.
Below are some defense stocks to consider and how they could be affected in the future:
This company, the world’s largest manufacturer of military weapons, is also a major supplier to NASA and other non-defense government agencies. With over 90% of its revenue from worldwide defense sales, LMT will have a hard time escaping flawlessly if the household ax falls. The stock has returned 3.2% after the last dividend increase.
Northrop Grumman Corp. (NOC)
This company is the third largest manufacturer of military weapons and equipment in the world, with approximately 90% of its sales in the defense sector, and also has a large government IT services business. In the company’s credit, it has streamlined its business to focus on more profitable contracts such as command, control, communications, computers, intelligence, surveillance and reconnaissance, or C4ISR. Internet security; unmanned aerial systems; manned aircraft; and services and logistics. NOC’s lower return of 2.0% reflects its strong balance sheet, low free cash flow payout (36%) and debt to capital (28%).
Raytheon Technologies Corporation (RTX)
Raytheon, the world’s sixth largest military contractor, specializes in the manufacture of high-tech missiles, advanced radar systems and sensors, defense electronics and anti-missile systems. Due to its non-platform orientation, RTN is one of the best positioned companies among the major defense companies. Its diversified military products and GaN technology have helped the company get a mix of small and large defense contracts. About 80 countries buy the company’s products. With a return of around 2.9%, RTN’s free cash flow payout (86%) is above my desired maximum and has good capital debt (33%).
General Dynamics Corp (GD)
General Dynamics is the fourth largest military contractor in the world and one of the world’s largest manufacturers of business aircraft. With its diversified offering, GD is also in a good position to weather cuts in defense spending. The company’s aerospace business remains significantly behind in large cabin aircraft and is set to remain strong for the next several years. There is a possibility that margins will increase as production becomes more efficient. GD’s strong balance sheet, low free cash flow payout (54%), and low debt to capital (27%) make GD an attractive stock. However, the low return of 3.0% will discourage me from improving my position in the short term.
Aerospace and defense companies that do a lot of government work typically have long contracts and are in a good position to weather the economic downturn. However, to varying degrees, each of the above companies are also engaged in non-governmental trade that could be affected by the next economic downturn. There is certainly a place for defense stocks in my dividend growth portfolio, but I will patiently wait for the right timing and entry point.
Full disclosure: Long LMT, RTN, GD in my dividend growth portfolio.
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