Play Portfolio Defense With These Contractors' Upside Potential

Includes: BA, GD, LMT, NOC, RTN
by: StockMarketPundits

During times of economic duress and uncertainty, one hears all of the talking heads discuss the need to play defense. Investors could look at the defense sector for dividends and stability in the near term, as they have contracts locking in their revenues for years out.

Boeing Co. (NYSE:BA)

Boeing, now based in Chicago, Ill., is a manufacturer of both commercial and military aircraft. BA should see considerable gains in their commercial aircraft segment over the next two decades, which should help offset any losses the company experiences in the defense segment from cuts in the US and ally spending in the years ahead. The company will also deliver its first 747-8 freighter on September 19. A little further out on the horizon, the company has the Dreamliner, and possibly another passenger plane in the next decade. BA has a dividend of $1.68/share and now yields 2.7% after its recent weakness.

Lockheed Martin (NYSE:LMT)

Lockheed Martin, based in Bethesda, Md., is one of the top suppliers of the Pentagon and has a market cap of $24 billion. LMT has a very respectable dividend currently at $3/share and yielding 4.2%. Lockheed has a payout ratio of 36% and a P/E of 9. Lockheed is one of the premier fighter jet manufacturers in the world, and the manufacturer of the F-35, the next generation of fighter jets for the US and its allies. The company also has a space unit and support services for aerospace.

General Dynamics (NYSE:GD)

General Dynamics is the third-largest defense contractor by market cap. The Falls Church, Va.-headquartered company has a market cap of roughly $21 billion. GD has a P/E of about 8 and a dividend of $1.88/share. The shares currently yield 3.2% and have a payout ratio of 25%. GD has four business segments: aerospace, combat systems, information systems and technology, and marine systems. According to the company’s website, these divisions consist of:

  • Aerospace, comprising Gulfstream Aerospace and Jet Aviation, has a global reputation for superior aircraft design, quality, safety and reliability; high-quality business-jet outfitting and refurbishing; and award-winning aircraft-support services.
  • Combat Systems produces supporting and sustaining land and expeditionary combat systems for the U.S. military and its allies, and develops new wheeled and tracked combat systems, ordnance, armament and advanced technical products to meet emerging customer requirements.
  • Information Systems and Technology provides technologies, products and services that support a wide range of digital communications, cyberspace, C4ISR, information-sharing and enterprise technology needs.
  • Marine Systems designs, builds and supports submarines and a variety of surface ships for the U.S. Navy and commercial customers.

General Dynamics is one of the better diversified defense contractors, with its revenues spread out over numerous defense categories and a portion of its business consisting of commercial/consumer demand.

Northrop Grumman Corporation (NYSE:NOC)

Northrop Grumman, based in Los Angeles, Calif., is a leading defense contractor with a broad range of products. The company provides, “innovative systems, products and solutions in aerospace, electronics, information systems, and technical services to government and commercial customers worldwide,” according to NOC’s website. Over the past decade NOC has positioned the company to move into the 21st century and participate in the modernization of America and its allies’ military forces. Northrop has done this via acquisition and organic growth.

NOC has a dividend of $2.00/share with a yield of 3.7% for investors. The company also is attractive to value investors as the P/E is just under 8. The $14 billion market cap company has low debt and more than adequate cash flow to service that debt. NOC provides shelter for investors as the shares look to have little downside and a respectable yield for a stock with the potential to provide capital gains above those of the S&P 500.

Raytheon (NYSE:RTN)

Raytheon is another defense contractor investors should take a look at. The $14 billion market cap company pays a dividend of $1.72, which yields 4.2%. This dividend trumps many of the other names, and with low debt and a payout ratio of 28%, appears safe even when one factors in potential long-term defense cuts down the road. RTN is also fairly priced, as it trades for 7.5 times earnings. The company is diversified across a broad range of defense fields and has really placed an emphasis on technology in its growth plans over the past decade. This has really paid off and allowed the company to continue to play a dominate role in supplying missiles, cyber-security and space exploration equipment to customers.

We think with the current environment, the healthy balance sheets and solid dividends these defense contractors offer investors make them intriguing plays for both income and capital gains in the near term. If Washington can signal to investors how severe any defense cuts will be, and they are less than what investors currently anticipate, we could see long-term gains materialize going forward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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