Getting Defensive With Defense Stocks

With the world markets in a seeming free fall with no bottom in sight it can become easy to get distracted by all the financial news headlines touting bear markets, deflation and recessions. These headlines can easily instill fear in anyone who is currently in the stock market or thinking about getting into the market. One mustn’t forget that it’s during these dramatic dips in stock prices that better values and yields rear their heads.

 

As you know, I like to look at various dividend paying stocks based on specific sectors. I always find it an easy way to identify major players in a business that one could readily understand. Reading the various dividend blogs we constantly discuss the “major” sectors that seem to be found in every long term dividend growth portfolio. You know the names I’m talking about. Energy, consumer staples, industrial, finance and more. However, the defense sector doesn’t seem to garner as much attention as I think it should. Some great names in this sector are starting to sport some pretty attractive numbers and one might say that it is a sector that can withstand a slowdown in economic activity and even a recession with the world being as insecure as it is. Some have said that the powers that be, LMT, BA, RTN, GD, NOC and the like are poised for some serious growth in 2016 despite fiscal headwinds with the world in an increasing state of war. Between activities in the Middle East with Russia ramping up military efforts, increased NATO fighters, not to mention China Sea escapades, North Korea, African and European terror activities, it can be said that defense contractors are poised to win from these tragedies. A sad but realistic view of the world in which we live. With that being said, let’s take an overview of some of the top names in the defense sector.

 

First up, Lockheed Martin Corporation (LMT). A company with roots that go back well over 100 years developing and manufacturing aerospace, security and combat systems. LMT currently yields a decent 3.07% with a moderate payout ratio of 58.1%. It has a track record of dividend raises going back thirteen years with an impressive ten year annualized dividend growth rate of 19.34%. That growth rate will definitely get you a nice yield on cost in several years time. From a valuation perspective LMT has a current PE of 19.1 which is higher than its five year average PE of 13.9. Forward PE looks a lot more attractive at 15.5. Even at these depressed prices LMT is expected to continue paying its dividend in 2016 with room for future growth.

 

Next is a company everyone is familiar with, The Boeing Company (BA). Another aerospace and defense corporation that has a 100 year history, BA has both civilian and military applications with its products and services it develops and manufactures. With a very healthy 3.46% yield and a payout ratio of 53.1% this dividend can be considered safe based on current EPS. As with LMT, BA has an impressive ten year annualized dividend growth rate of 13.79%. Rated four stars by Morningstar, BA has a current PE of 15.8 which is below its five year average PE of 17.3. Forward PE is even lower at 12.1. No doubt, these names as with many other companies in various sectors are starting to look a lot more enticing at these beaten down levels.

 

Continuing our overview of the defense sector we come across Raytheon Company (RTN). Founded in 1922, RTN develops various command and control systems for missiles, radar, surveillance and reconnaissance equipment. Yielding a more modest 2.22% with a relatively low payout ratio of 40.2%, RTN sports a safe current dividend with room for growth going forward. Having raised its dividend for eleven straight years, RTN has an equally impressive ten year annualized dividend growth rate as LMT and BA of 11.51%. With a current PE of 17.8 this stock is trading above its five year average PE of 12.5. Forward PE is a bit lower at 15.1.

 

Now, let’s take a look at General Dynamics Corporation (GD). As with the other names mentioned, GD has a long one hundred plus year history developing and manufacturing various weapons systems as well as combat vehicles and marine vessels including naval ships and submarines. GD currently yields a modest 2.17% with a low payout ratio of just 30.6%. Of all the names mentioned, GD has the most wiggle room regarding the safety of its dividend based on current cash flow. GD also has a fairly long track record of dividend raises going back eighteen years with a ten year annualized dividend growth rate of 13.18%. The current PE of GD is 14.2 which is slightly above its five year average of 13.3. Forward PE is slightly lower at 12.3.

 

Finally, in the defense space we have Northrop Grumman Corporation (NOC). The “youngest” of the companies mentioned, NOC develops both military and civilian defense and security applications to government and commercial customers worldwide. NOC offers us the smallest yield of the names mentioned at just 1.71% with a low payout ratio of 32.5% making this a very safe yield with room for future growth. Speaking of growth, NOC has a ten year annualized dividend growth rate of 13.01%. As with all the names mentioned above, an impressive dividend growth rate by any measure. Looking at valuation, NOC has a current PE of 17.8 well above its five year average of 11.8. Definitely the widest spread among the names mentioned. Forward PE sits at 15.7. Looks like NOC and LMT have been the most stable during the general sell off in the market the last several weeks with BA being the biggest loser during the same time frame.

 

Clearly, these defense names have been through many economic cycles in their one hundred plus year histories. Current economic headwinds may just prove to be good opportunities to buy into these dividend paying stalwarts that each sports an impressive ten year annualized dividend growth rate along with decent, safe current yields.

 

Do you own any defense names in your dividend growth portfolio? Please let me know below.

 

Disclosure: Long NONE

18 thoughts on “Getting Defensive With Defense Stocks

  1. DivHut,

    I do love this sector. LMT has been in the top of my watchlist for a long time along with NOC. The sector just breathes longevity. Not only do most of these have military applications, but most also have strong governmental contracting arms that do loads of business. For instance I live in the DC area, and it is some what well known that LMT has a large Environmental Services arm (though it accounts for only a fraction of their business). Who knew? Also a bunch have larger applications in the civilian world as you point out with BA.

    Another fun fact is that NOC recently won the long range bomber contract, pushing up their stock despite BA and LMT’s protests. LMT is still the biggest plane producer with the F-35 (there are lots of names for it other than Lightning II due to its overruns), and BA still makes the Navy’s mainstay fighter / multirole plane the F-18/A Hornet & F-18 Super Hornet.

    You could even elongate this article with UTX, OA, and OSK, but I would wager time is better spent elsewhere.

    As always, love the themed articles,
    Gremlin
    Dividend Gremlin recently posted…Loyal3 Buys January, 2016My Profile

    • Hi DG,

      I think after writing about this sector I need to really consider a name or two for my own portfolio. I’m not sure why we don’t read much about this seemingly defensive sector among the dividend bloggers. It seems that energy, REITs, MLPs and the like grab most of our collective attention. There’s no denying the staying power of each of these corporations because of military, civilian and government ties they possess. Thanks for sharing your insight regarding LMT and their environmental services arm. It just goes to show the far reaching capabilities of these defense corporations. Thank you for stopping by and commenting.

  2. NOC is barely went down this morning. It’s one of the most beloved stocks right now. Wars is everywhere. Every time, there is a shooting somewhere, people would buy guns and ammunition like crazy. Hence, their profit is forever growing.

    Right now I’m looking for beaten up aristocrats. Deals are everywhere on Wall Street, we just have to grab this opportunity. If it’s going to be 2009 all over again, then I’ll be sure to work longer so that I can financially be set for life with just dividend income alone. Right now, my rental income is covering my expenses.

    • Hi Vivianne,

      It’s a sad state of world affairs when wars, terror, saber rattling and general insecurity is our reality and it’s that reality that has become a boon for defense contractors. There’s little doubt that the need for the products and services of these companies will go away any time soon which just makes them that more defensive in nature and can offer some stability to any long term dividend income portfolio.

      These days it seems that deals are everywhere to be found in practically all sectors so I can understand you wanting to fish around for deals among the aristocrats. Hey, if it’s 2009 all over again you can be sure that many of the dividend investors will be backing up the truck on some beaten down high quality names. As always, I appreciate your comment.

  3. BA and LMT have been on my radar for some time. As you noted, BA is historically better valued now than in the past. Other than the military applications of LMT, it also has some excellent research labs that are pretty close to making some breakthroughs in energy technology, namely fusion. While it might not be profitable for sometime, I love companies that continually invest in research.

    Scott
    Scott @ TwoInvesting recently posted…Scott’s Goals for 2016My Profile

    • Hi Scott,

      The defense sector can easily be considered quasi-tech as each has to continually invest in research and development for their respective products and services. Truth be told, I never considered any defense names for my portfolio till now. I mostly focused on the aristocrats but realize that every name mentioned in this post has tremendous defensive characteristics as the consumer staples do, especially in the world in which we live today. As I commented above, wars, terror, saber rattling and general insecurity will be a continuous boon for all defense corporations. Thank you for sharing your thoughts.

  4. Nice article, DH. I’ve been watching these defense stocks price rising like shooting rockets and a little leary to buy. However, with market correction, prices are just a fraction better, but, still in over-valued territory. I recently initiated LMT and GD in my portfolio but do not feel not very comfortable adding more, unless, prices correct quite a bit. Keep racing!
    Race2Retirement recently posted…Recent Stock Purchase II – January 2016My Profile

    • Hi R2R,

      Thank you for your kind words regarding the post. Much like the consumer staples sector, I think the resilience of defense sector shows too. There’s a reason why consumer staples are always considered expensive and that may be the same with defense stocks simply because of their high quality nature. Thanks for sharing your holdings in LMT and GD with us. I think this sector is under appreciated by many long term dividend growth investors. I know I have overlooked this sector as I hold none of the names mentioned. Thank you for stopping by and commenting.

  5. Being both great companies with a excellent dividend growth track, which one do you prefer BA or UTX ?
    Personally I preffer UTX´s diversification but it´s true that Boeing has also a bright future and its 3,6% dividend yield is awesome.

    • Hi SEOTXE5,

      While I do not own either name, I do have UTX on my watch list. Both look like excellent long term investments with both feeling some near term headwinds. Hope this answers your question. Thank you for commenting.

  6. Since I started investing in North American stocks in the beginning of 2014, LMT has been one of my best investments. It has delivered both capital appreciation and dividend raises. Not super-enthusiastic to buy more right now, but that’s partly because it’s my second biggest holding.
    GD is on my watch list and I would like to see it in my portfolio some day. Thanks for pulling this together. These sector-themed articles are always interesting read.
    BR, DL
    Dividend Lord recently posted…4 Recent Buys – ADM, JNJ, PG, UNMy Profile

    • Hi DL,

      Glad you enjoyed this read. I think it’s fun to look at dividends from various sector perspectives. For a beginner investor it may make it easier to identify businesses based on familiar sectors. Glad to hear LMT has worked out for you in terms of being a successful investment. It’s always great when you get the double bonus of enjoying capital appreciation along with dividend growth and accumulation. The defense sector is a sector that I need to consider for my own portfolio. Thank you for commenting.

  7. Nice article Divhut, I enjoyed reading it.

    What century, or even what decade, has there not been a war? What Government isn’t going to spend a large amount of money on its defence budget? I cannot think of one. If the USA were to become involved in a large war, or a world war were to happen, military spending would be one of the very few things that the Govt would increase spending on.

    Great mentions Divhut.
    Tristan @ Dividendsdownunder recently posted…Superannuation Fund: July BackdateMy Profile

    • Hi Tristan,

      Thank you for your kind words regarding the article. Unfortunately, what you write in your comment highlights the sad state of human civilization. As long as there are people, there will be wars and it’s true that any government, large or small, will do whatever it can to defend itself. I guess that’s why this sector is very defensive and can be likened to consumer staples in terms of their reliability in business and will always be in demand. Thank you for stopping by and commenting.

    • Hi BSR,

      The way to world is these days it seems that volatility, skirmishes and all out wars are here to stay. Sad for the world but good business for the defense sector companies. Regarding the Loonie, I wouldn’t fret too much about it. As you know it’s all cyclical. Just a few short years ago the U.S. dollar was much, much weaker with the Loonie at parity and even more valuable than the U.S.D. Generally speaking, strong currencies become weaker and weaker currencies become stronger in a never ending up and down cycle. As always, I appreciate your comment.

  8. I’ve owned but haven’t added to LMT for a few years. They are the top performing stock I own, up over 100%. I certainly can’t complain and have been impressed with the company.

    Thanks for posting.

    • Hi Brent,

      The more I look into this sector the more I like its very defensive and stable nature which is what I look for in most of my investments. After writing this article I am going to add LMT to my watch list and “wait” for slightly better price and value though I have a feeling like many names in the consumer staples space, LMT might be a stock that rarely goes on sale. Thank you for your comment.

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