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