No one ever wants to own stocks that aren't household names. While companies such as Apple (AAPL), McDonald's (MCD), and Phillip Morris' spinoff Altria (MO) get all the attention, companies in the defense sector have quietly been consistently raising dividend payouts by over 15% a year the last couple years.
The defense sector has fallen out of favor with many investors because of a fear of cuts in spending and an end to major conflicts in Iraq and Afghanistan. Also, the belief that Republicans are more hawkish on military spending has not helped theses stocks either.
Today, with the S&P 500 and its tracking exchange traded fund, SPY (SPY), off nearly 10% in the last month, dividend investing has become popular once again. Still, many leading dividend stocks such as Altria and McDonald's are trading at or near 52-week highs.
Northrop Grumman (NOC) is a nearly $15 billion aerospace and defense contractor that raised its quarterly dividend nearly 18% in the last 15 months from $.47 a share in February of 2011, to $.55 a share today. Northrop Grumman did slightly drop in year-over-year sales during the first quarter, but the company still handily beat analyst estimates.
Northrop Grumman recently spun-off its ship-building business, and the company has repositioned itself very well for new defense contracts in areas such as information technology, space, aircraft and electronic systems. The company specializes in designing new aircraft such as many of the drones, designs new radar systems, and recently won a highly sought after NATO contract to redesign the alliance's ground surveillance system.
Northrop Grumman today trades at around 9x the average estimate of next years likely earnings, pays a dividend of around 4%, and has consistently grown in the low double-digits for the last several years.
Lockheed Martin (LMT) is a $27 billion company specializing in the production of military aircraft, information and space technology, and electronic and radar systems. Lockheed Martin recently blew-out first quarter earnings by nearly 15% and raised its dividend by 33%. The company increased its earnings per share grow over 25% year-over-year from $1.57 to $2.02. Lockheed Martin has aggressively cut costs by buying out pension liabilities and cutting its workforce in the last couple of years.
While the company saw a decline in revenues in its space and information division, Lockheed Martin's very expensive F-35 program is now very profitable, and the company is also successfully producing several transport planes as well. Lockheed Martin looks ready to increase production of its highly sought after and expensive F-35 fighters, as well. Lockheed Martin has had some labor disputes of recent, but the company reached a new labor agreement two major unions a couple of weeks ago.
Lockheed Martin shares are trading at around 10x an average estimate of next years likely earnings, pays a nearly 5% dividend, and has consistently beaten analyst estimates by a fairly wide margin.
Raytheon (RTN) is $17 billion company specializing in cyber security, electronic information technology, missile systems, and airborne defenses. Raytheon recently beat analyst estimates by nearly 15% this past quarter, and announced a 16% dividend raise. The company yields nearly 4% today.
Raytheon is very well-positioned to benefit from new defense and homeland security spending on border control, and the company also is likely to see significant new contracts, as electronic warfare and hacking become bigger threats in the future as well.
Raytheon has grown in the low double-digits the last five years, and analysts are projecting high single-digit growth in the next five years. The company has consistently beaten analyst estimates and trades at around 9x average estimates of next year's likely earnings.
To conclude, the Senate recently announced bipartisan support for defense spending of $631 billion, with no new major cuts to the size of the military, and reduction in Pentagon personnel ordered instead. Washington has talked about capping defense spending for some time, but the defense budget has not fallen significantly since the end of the war in Iraq, and only $88 billion of the defense budget for next year will go towards Afghanistan.
The defense budget has also increased every year under Obama, and the president's current budget calls for defense spending nearly 20% higher than 2004 levels. Overall spending in Washington has grown at around 3% a year the last three years, even since the tea party took power. While the types of defense contracts awarded will likely change, defense spending has consistently had strong bipartisan support.