Defense stocks gained immense traction following Russia’s invasion of Ukraine last year. While the war drags on along with other geopolitical issues, it could be an opportune time to load up shares of fundamentally sound defensive companies such as Raytheon Technologies Corporation (RTX), Lockheed Martin Corporation (LMT), and Northrop Grumman Corporation (NOC) to your portfolio for substantial returns. Let’s look closer at their fundamentals and evaluate the potential of these stocks.
Earlier this month, President Biden released an $842 billion defense spending blueprint for the fiscal year 2024, with a 3.2% or $26 billion increase over current military spending levels. Designed to prioritize resources for critical investments enabling the department to continue implementing the National Defense Strategy, it should help defend against current and future threats.
With growing threats from Russia and China, U.S. Senate Republican leader Mitch McConnell emphasized increasing defense spending over the next year. Recently, a $259.30 billion budget request was published by the Secretary of the Air Force in order to continue upgrading the Air Force and Space Force to address changing threats and support ongoing requirements like training, readiness, and the development of new technologies.
Moreover, the global defense market is expected to reach $718.12 billion in 2027, growing at a CAGR of 5.6%. Amid the continued threat of terrorism, the increased adoption of unmanned combat vehicles, corner shot weapons, American-made firearms, fighter jets, and explosives should bode well for the companies in this space.
Investor’s interest in defense stocks is evident from the iShares U.S. Aerospace & Defense ETF (ITA) 17.5% returns over the past nine months. Given this backdrop, fundamentally sound dividend-paying defense stocks RTX, LMT, and NOC could be ideal buy-and-watch options in March.
Raytheon Technologies Corporation (RTX)
RTX is a global provider of systems and services for commercial, armed forces, and governmental clients in the aerospace and defense industries. Collins Aerospace; Pratt & Whitney; Raytheon Intelligence & Space; and Raytheon Missiles & Defense make up its four operating segments.
On February 17, the U.S. Air Force Life Cycle Management Center contracted RTX’s Collins Aerospace business to continue producing new, advanced propellers for C-130 aircraft. The $135 million contract would allow Collins to manufacture and support new NP2000 propeller systems and help generate substantial revenues for the company.
On February 16, the company declared a quarterly dividend of $0.55 per outstanding share on its common stock, payable to its shareholders on March 23, 2023. RTX’s four-year average dividend yield is 2.40%, and its current dividend of $2.20 translates to a 2.30% yield on prevailing prices.
Its dividend payouts have grown at a 5.9% CAGR over the past three years and a 4.8% CAGR over the past five years. Also, it has a record of 29 years of consecutive dividend growth.
On January 24, the company announced its 2023 outlook and plans to realign into three business segments. Backed by its solid full-year results with strong free cash flow, it expects its net sales to range between $72.0 billion and $73.0 billion, while its adjusted EPS is expected to fall between $4.90 and $5.05 in 2023.
In the fiscal fourth quarter that ended December 2022, RTX’s net sales increased 6.2% year-over-year to $18.09 billion. Its operating profit grew 13.7% from the year-ago value to $1.50 billion. The company’s adjusted net income came in at $1.87 billion, up 15.7% year-over-year. Also, its non-GAAP EPS increased 17.6% from the year-ago value to $1.27.
Analysts expect RTX’s EPS and revenue to increase 3.3% and 7.9% year-over-year to $1.20 and $17.61 billion, respectively, for the fiscal second quarter (ending June 30, 2023). It has a commendable earnings surprise history, surpassing the consensus EPS estimates in each of the four trailing quarters.
RTX’s revenue and EBITDA have grown at 13.9% and 10.3% CAGRs over the past three years, while its total assets have grown at a 4.4% CAGR over the same period.
Over the past six months, the stock has gained 12.4% to close the last trading session at $95.75.
RTX’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Among the 73 stocks in the Air/Defense Services industry, it is ranked #18. RTX is also rated B in Growth and Stability. To see additional POWR Ratings for Value, Sentiment, Quality, and Momentum for RTX, click here.
Lockheed Martin Corporation (LMT)
LMT, a security and aerospace company, engages in the research, design, development, manufacture, integration, and sustainment of technology systems, products, and services worldwide. It operates through four segments: Aeronautics; Missiles and Fire Control; Rotary and Mission Systems; and Space.
On March 7, 2023, LMT, Korea Aerospace Industries, and Red 6 Aerospace announced a new collaboration to offer advanced 21st Century Security capabilities across various training and combat aircraft.
LMT’s strategic advantages in digital engineering and open architectures, alongside its collaborative networks, should enable the company to achieve substantial progress in its platform’s development, production, upgrades, responsiveness, and sustainment.
Also, on February 17, LMT announced its collaboration with the U.S. Navy to equip surface ships with hypersonic strike capabilities. The Navy granted LMT a contract valued at more than $2 billion to integrate the Conventional Prompt Strike (CPS) weapon system on ZUMWALT-class guided missile destroyers (DDGs).
This association presents an opportunity for LMT to advance hypersonic strike capabilities nationwide, potentially augmenting the company’s expansion and operations.
The company’s four-year average dividend yield is 2.58%, and its current dividend of $12 translates to a 2.58% yield on prevailing prices. Its dividend payouts have grown at an 8% CAGR over the past three years and an 8.7% CAGR over the past five years. Also, it has a record of 20 years of consecutive dividend growth.
LMT’s net sales increased 7.1% year-over-year to $18.99 billion for the fourth quarter that ended December 31, 2022. The company’s non-GAAP net earnings grew 1.7% from the prior year’s period to $2.01 billion, while its non-GAAP EPS rose 7.9% year-over-year to $7.79. Over the past three years, its revenue and total assets grew at CAGRs of 3.3% and 3.6%, respectively.
Street expects LMT’s revenue and EPS to increase 2.9% and marginally year-over-year to $15.89 billion and $6.39, respectively, for the fiscal second quarter (ending June 2023). It surpassed the EPS estimates in three of the four trailing quarters.
The stock has gained 15.3% over the past nine months to close the last trading session at $465.87.
LMT’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
It has a B grade in Stability, Sentiment, and Quality. It is ranked #10 out of 73 stocks in the same industry. Click here to see the other rating of LMT for Growth, Value, and Momentum.
Northrop Grumman Corporation (NOC)
NOC operates as a global aerospace and defense technology company. The company operates through four segments: Aeronautics Systems; Defense Systems; Mission Systems; and Space Systems.
On March 15, NOC paid its shareholders a quarterly dividend of $1.73 per share on the company’s common stock. Its forward annual dividend of $6.92 translates to a 1.56% yield on current prices. Its four-year average dividend yield is 1.56%. Also, its dividends have grown at 9.4% and 11% CAGRs over the past three and five years, respectively.
NOC has a record of 17 years of consecutive dividend growth. Over the past three years, its EBITDA and net income grew at CAGRs of 22% and 29.6%, respectively. Also, its EPS has grown at a CAGR of 33.5% over the same period.
For the fiscal 2022 fourth quarter that ended December 31, NOC’s total sales increased 16.1% year-over-year to $10.03 billion, while its total operating income rose 22.1% from the year-ago value to $906 million. Also, the company’s adjusted net earnings and EPS came in at $1.16 billion and $7.50, up 22.2% and 25% year-over-year, respectively.
The consensus revenue estimate of $9.18 billion for the first quarter (ending March 31, 2023) represents a 4.3% increase year-over-year. Its EPS is expected to increase by 3% per annum over the next five years. NOC’s shares have gained marginally intraday to close the last trading session at $443.60.
NOC’s solid prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system. It also has a B grade for Stability and Sentiment. Within the same industry, it is ranked #15 of 73 stocks.
Click here to see the additional ratings for NOC (Growth, Value, Momentum, and Quality).
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RTX shares were trading at $97.49 per share on Monday afternoon, up $1.74 (+1.82%). Year-to-date, RTX has declined -2.87%, versus a 2.62% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions. More...
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