Raytheon (NYSE:RTN) is one of the largest defense contractors in the U.S. and the world. Like many of its associated companies - Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT), General Dynamics (NYSE:GD), and Northrop Grumman (NYSE:NOC) - it is entering a period of uncertainty as the U.S. defense budget faces cuts. Raytheon has some advantages over other contractors as it has a focus on radars, electronic systems and some missiles. It does not make aircraft, ships, or armored vehicles.
With the U.S. restructuring its defense spending, it is presumed that ships, aircraft and Army helicopters, and ground vehicles will face the most reductions, as the U.S. continues to invest in some new equipment, including missile defense, but does not buy as may weapons. Those, along with personnel costs, are the beef of the defense budget and that is where the biggest hits will be taken.
For the last quarter, Raytheon was able to report an increase in earnings on less revenue. The majority of defense contractors saw their revenue fall last year. Through cost cutting and restructuring, most were able to maintain earnings and continue their dividends and other programs. Raytheon is predicting a small decrease in revenue for 2012.
Raytheon stock, like other defense contractors, has remained flat over the past year, although it has added about $12 since last September. This has brought it back to close to its 52-week high set almost a year ago. Technical analysis on this stock shows confidence that there will be little decline in its price. The question is whether it will continue to increase or stay where it is? Some like Steven Rogue believe that this growth will continue, while others like Valuentum believe it will remain in its current range.
I agree with the latter analysis. There is little in the upcoming planned defense spending by the U.S. or its allies that will favor one defense contractor over another. All will see reduced revenue in the next few years and will continue to do their best to maintain earnings and pay dividends through reduced costs on overheads and pensions.
Raytheon just announced the eighth annual increase in its dividend. This now stands at 50 cents a quarter, or half of what Lockheed Martin pays out. Lockheed is not trading at twice Raytheon's price, but closed Friday at just under $90 or almost 80 percent higher. Whether is better to own 1.8 shares of Raytheon to receive a dividend of forty cents a year less is a personal choice. Historically, Lockheed has offered the best yield, growing its dividend alongside Raytheon.
Spending money on defense stocks right now, expecting large growth in share value is not the best approach. Overall, they do not offer any value much beyond their dividends . Expect their prices to stay within a rather flat trade pattern at least in the next six months. The finalization of the 2013 defense budget this fall and the announcement of 2014 spending in February will be key to the next three to five years for these companies and their stock prices. At the same time, due to this, shorting them is probably not as viable as it has been in the past.
Right now it is best to stay where you are and look for other stocks with much higher growth potential in other industries.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.