The war in the Ukraine has led to elevated geopolitical risk for the markets. During such turbulent times, risk-averse investors seek stocks that can withstand volatility. Defense stocks typically outperform the broader market during challenging periods. Moreover, many defense companies offer solid dividend yields and have the capacity to raise dividends annually. In this article, we will explore the prospects of three resilient defense stocks that provide reliable dividends.
L3Harris Technologies (LHX) L3Harris Technologies was formed through the merger of L3 Technologies and Harris Corporation on June 29, 2019, making it the sixth largest defense contractor. The company now reports three business segments: Integrated Mission Systems (about 42% of revenue), Communication Systems (about 23% of revenue), and Space and Airborne Systems (about 35% of revenue). L3Harris announced its Q1 2023 results on July 26th, 2023. Company-wide revenue increased by 12% due to strength in all three segments and the Tactical Data Links (TDL) acquisition. Diluted non-GAAP EPS decreased (-8%) to $2.97 from $3.23 year-over-year due to higher pension and interest costs. The Integrated Mission Systems segment revenue rose 8% because of increased revenue in Commercial Aviation, classified Maritime, and ISR. Revenue for Space & Airborne Systems grew by 9%. The growth came from Space, Intel & Cyber, Mission Avionics, and Mission Networks but was offset by declines in legacy platforms. Communications systems revenue increased 30% due to higher volumes in Broadband Communications, Tactical Communications, Public Safety, and legacy platforms. The funded book-to-bill ratio is 1.18X. The company won $5.6B in awards and its total backlog is approximately $25B. The conflict in Ukraine should bring some positive impacts, though offset by supply chain disruptions and high labor costs. Bottom line growth will be driven by organic sales growth, higher margins, and robust share buybacks. Despite the slowdown, we are currently predicting an average annual earnings per share growth of 8% until 2028. LHX has a secure dividend payout and a 2.6% current yield. Lockheed Martin (LMT) Lockheed Martin is the world’s largest defense company. It earns around 60% of its revenues from the U.S. Department of Defense, 10% from other U.S. government agencies, and the rest from international clients. Its aeronautics segment, which generates about 40% of total sales, manufactures well-known military aircraft like the F-35, F-22, F-16, and C-130. Lockheed Martin is an established military prime contractor. It has developed the know-how to modernize its platforms with a useful lifespan of decades. In the 2023 third quarter, LMT’s revenue of $16.88 billion exceeded estimates by $160 million. Revenue rose 2% year-over-year. Adjusted earnings-per-share of $6.77 beat the estimate by $0.15. Aeronautics sales decreased 5% due to lower net sales for the F-35 program. This was offset by growth in other segments, including a 4% increase in Missiles & Fire Control and a 9% increase in Rotary & Mission Systems.Lockheed Martin, a leading defense contractor, has seen its earnings per share (EPS) increase significantly due to the success of the F-35, tactical and strike missiles, satellite and missile defense programs, the Sikorsky acquisition, and a reduction in share count. The F-35, one of the world’s most advanced stealth military aircraft, is expected to drive long-term growth, with the Pentagon planning to purchase 2,456 units, not including sales to allies, making it the largest defense program in history.
On October 6, 2023, Lockheed Martin bolstered its shareholder cash returns by increasing its share repurchase authorization by $6 billion. Additionally, the company raised its quarterly dividend by 5% to $3.15 per share. With a history of raising dividends for 22 consecutive years, Lockheed Martin is an attractive income stock, having grown its dividend by nearly 10% annually over the past decade. Currently, it offers a 3% dividend yield. Northrop Grumman Corporation, one of the top five US aerospace and defense contractors by revenue, operates in four business segments: Aeronautics Systems (aircraft and UAVs), Mission Systems (radars, sensors, and systems for surveillance and targeting), Defense Systems (sustainment and modernization, directed energy, tactical weapons), and Space Systems (missile defense, space systems, hypersonics, and space launchers). The company manufactures the B-2 Spirit, E-2D, E-8C, RQ-4 Global Hawk, MQ-4C Triton, and MQ-8B/C Fire Scout, and contributes to the F-35 and F/A-18. In 2022, Northrop Grumman reported over $36 billion in revenue and won the contract for the B-21 Raider. In 2023, Northrop Grumman has shown strong performance, with a 9% year-over-year increase in company-wide revenue in the second quarter. Aeronautics Systems revenue rose by 2% due to higher volumes in Manned Aircraft and Autonomous Systems, while Defense Systems revenue increased by 10% due to increased sales in ammunition programs, the IBCS, HACM, and NATO AGS ISS. The company’s earnings have grown substantially over time, driven by contract wins, modernization and upgrades, services, and acquisitions, with a significant reduction in share count also contributing to EPS gains. Looking ahead, Northrop Grumman is poised for both revenue and EPS growth through its involvement in the F-35, B-2, E2-2D, B-21, and space platforms. The company has a history of paying a growing dividend for 20 years, with a current low payout ratio of approximately 33%, indicating potential for further increases. Northrop Grumman’s stock currently yields 1.5%.
