3 Great Defense Stocks Paying Good Dividends

(Image credit: Courtesy Northrop Grumman)

published 10 February 2017

In the wake of President Trump’s victory in November, the stock market has experienced a mix of exuberance and uncertainty. Nowhere has this been more apparent than in the defense sector. Since Election Day, the average aerospace and defense stock has returned 11.2%, outpacing Standard & Poor’s 500-stock index by 3.4 percentage points. But that run hasn’t come without hiccups, such as a presidential tweet decrying a major U.S. fighter jet program, which sent the stocks tumbling in December. Nevertheless, if the Trump administration can follow through on plans for a “historic” investment in the armed forces, major military contractors stand to profit.

Analysts expect these three stocks — all issued by major military contractors — to appreciate in price over the next year. But even if share prices wane, each company boasts a robust balance sheet and a dividend that has grown annually for at least a dozen years.

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General Dynamics

Symbol: GD
Price: $182.59
Market capitalization: $55.2 billion
52-week low/high: $125.74-$187.37
Estimated 2017 earnings per share: $9.76
Price-earnings ratio: 19
Dividend yield: 1.7%
The company: General Dynamics is an aerospace and defense manufacturer that builds aircraft, ships, armored vehicles and information technology systems.
The story: If defense spending increases under a Donald Trump presidency, then General Dynamics stands to cash in. Trump’s frequent promises to expand the naval fleet, for instance, should benefit the shipbuilding unit’s flagship Columbus-class submarine program, says Morningstar analyst Chris Higgins. In addition to its military business, General Dynamics also manufactures the Gulfstream line of private jets. Though demand for private jets is waning, Gulfstream boasts the highest profit margins in the business, says Morningstar. And analysts at investment giant Barclays say GD should be able to keep aerospace earnings steady as the company sells off older private jets while transitioning to new models over the next couple of years.
The stock: The stock’s 1.7% yield won’t turn many heads, but investors can be confident that the dividend will grow. The firm has hiked the annual payout every year since 1999, most recently by 10%, to $3.04 per share in 2016. Defense stocks rose in the run-up to and aftermath of the presidential election. General Dynamics was no exception, returning 41% over the past 12 months. But analysts at Barclays believe the stock still has room to appreciate, supported by the company’s strong balance sheet and propelled by a robust backlog of aerospace orders. Barclays sees the stock’s price increasing by 10% over the next 12 months.

Northrop Grumman

Symbol: NOC
Price: $234.84
Market capitalization: $41.1 billion
52-week low/high: $180.10-$253.80
Estimated 2017 earnings per share: $11.82
Price-earnings ratio: 20
Dividend yield: 1.6%
The company: Northrop Grumman is an aerospace defense technology company that manufactures manned and unmanned aircraft along with electronic warfare technology.
The story: Northrop Grumman’s stock took a hit after Donald Trump tweeted that costs for the Pentagon’s F-35 fighter plane program (in which Northrop has a one-third stake) were “out of control.” The stock shed 4% after the tweet was launched in December, but it has since bounced back. That kind of volatility might spook investors, but if a military buildup is in the works, Northrop Grumman is sure to be a part of it. Aside from the F-35, other military projects already in the works at Northrop include the Triton and Global Hawk unmanned aerial vehicles, the E-2D Hawkeye early-warning aircraft and the B-21 bomber. Last year’s government appropriation for the B-21 alone could potentially secure more than $70 billion in revenue for Northrop, says analyst Peter Arment, of Baird, a financial-services firm. He expects revenues to accelerate, logging annualized growth in the mid-single-digit percentages from 2017–20, giving Northrop Grumman the “best growth profile” among large-company defense stocks.
The stock: Shares trade at 20 times estimated earnings, which seems a little steep until you consider that earnings are expected to log annualized growth of 8% through 2020, according to Arment’s projections. He thinks the stock can hit $260, up 11% from its recent price, over the next 12 months. The stock yields 1.6% and sports a dividend that has been on the rise every year since 2004. A 13% hike in 2016 brought the annual payout to $3.60 per share.

Raytheon

Symbol: RTN
Price: $149.24
Market capitalization: $43.8 billion
52-week high/low: $119.38-152.58
Estimated 2017 earnings per share: $7.37
Price-earnings ratio: 20
Dividend yield: 2.0%
The company: Raytheon is one of the five major U.S. defense contractors, supplying the military with missiles and radar systems, among other products.
The story: Trump’s demand that NATO nations increase their defense budgets may prove beneficial for Raytheon. Almost all of the 9% gain in Raytheon’s defense system sales posted through the first three quarters of 2016 came from overseas projects. With more nations already considering measures to boost defense spending, Raytheon could be a strong contender for new contracts, says Value Line analyst Robert Harrington. Raytheon does well domestically, too. The company reaps 69% of its revenue on U.S. soil. The Pentagon is expected to request $2 billion in funding for 4,000 of Raytheon’s Tomahawk missiles over the next five years and $2.9 billion for its 650 SM-6 Interceptor missiles.
The stock: Raytheon has increased its dividend every year since 2004, by 9% to $2.93 per share in 2016. The trend is not likely to change anytime soon. Due to expected military budget increases and a robust backlog of orders, Baird analyst Peter Arment projects Raytheon to generate a cumulative $8 billion in free cash flow (cash profits, minus the capital expenditures needed to maintain the business) from 2017 to 2019. He rates the stock a long-term buy and sees it hitting $170 over the next year, representing a 14% increase over its recent price.