The ongoing conflict in Ukraine has significantly increased geopolitical risk, prompting risk-averse investors to seek stocks that can withstand market volatility. Historically, defense stocks have outperformed the broader market during challenging times, and many offer robust dividend yields with the potential for annual increases. This article examines three resilient defense stocks that provide reliable dividends.
L3Harris Technologies (LHX)
L3Harris reported Q1 2023 results on July 26th, 2023. Companywide revenue rose 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 on a year-over-year basis because of higher pension and interest costs. Integrated Mission Systems segment revenue climbed 8% as a result of higher revenue in Commercial Aviation, classified Maritime, and ISR. Revenue for Space & Airborne Systems increased 9%. Growth was driven by Space, Intel & Cyber, Mission Avionics, and Mission Networks but 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.
Lockheed Martin (LMT) is the largest defense company in the world. It generates around 60% of its revenues from the U.S. Department of Defense, another 10% from other U.S. government agencies, and the remainder from international clients. Its aeronautics segment, which accounts for about 40% of total sales, produces well-known military aircraft like the F-35, F-22, F-16, and C-130. 6B in awards and total backlog is approximately $25B. The conflict in Ukraine provides some tailwinds but is offset by supply chain disruptions and high labor costs. Bottom line growth will be driven by organic sales increases, higher margins, and robust share buybacks. Despite the slowdown, we are currently forecasting an average annual earnings per share growth of 8% out to 2028. LHX has a secure dividend payout and a 2.6% current yield.
Lockheed Martin is an established military prime contractor. It has developed the expertise to modernize its platforms, which have a useful lifetime of decades.
In the 2023 third quarter, LMT’s revenue of $16.88 billion beat estimates by $160 million. Revenue increased 2% year-over-year. Adjusted earnings-per-share of $6.77 beat 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 4% growth in Missiles & Fire Control, and 9% growth in Rotary & Mission Systems. Lockheed Martin’s earnings per share has been increasing on the strength of the F-35, tactical and strike missiles, satellite and missile defense programs, the Sikorsky acquisition, and lower share count. The F-35 is one of the most advanced stealth military aircraft in the world and will likely drive growth for the long-term.The Pentagon plans to buy 2,456 F-35s. This number excludes sales to allies and it will become the largest defense program in history. The company has increased shareholder cash returns. On October 6, 2023, it increased its share repurchase authorization by $6 billion. Recently, the company increased its quarterly dividend by 5% to $3.15 per share. Lockheed Martin has raised its dividend for 22 consecutive years, making it an appealing income stock. It has grown its dividend by nearly 10% per year on average over the last decade. Currently, Lockheed Martin offers a 3% dividend yield. Northrop Grumman (NOC) is one of the five largest US aerospace and defense contractors based on revenue. The company reports 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).
Northrop Grumman, a leading defense contractor, manufactures a range of military aircraft including the B-2 Spirit, E-2D, E-8C, RQ-4 Global Hawk, MQ-4C Triton, and MQ-8B/C Fire Scout. The company also provides content on the F-35 and F/A-18 and has recently won the contract for the B-21 Raider. In 2022, Northrop Grumman reported revenues of over $36 billion.
The company has continued to perform well in 2023, with a 9% year-over-year increase in total revenue in the second quarter. Revenue for Aeronautics Systems grew by 2% due to increased volumes in Manned Aircraft and Autonomous Systems, despite declines in E-2, F/A-18, and JSTARS. Revenue for Defense Systems saw a 10% rise, driven by higher sales in ammunition programs, the IBCS, HACM, and NATO AGS ISS.
Northrop Grumman’s earnings have significantly increased over time, propelled by top line growth from contract wins, modernization and upgrades, services, and acquisitions.
Northrop Grumman, a leading player in the defense industry, has been rewarding its investors with a growing dividend for two decades. The company’s significant reduction in share count has driven earnings per share gains, and its involvement in key projects such as the F-35, B-2, E2-2D, B-21, and space platforms is expected to drive both revenue and EPS growth.
With a current payout ratio of approximately 33%, Northrop Grumman’s dividend has ample room for further increases. The stock currently yields 1.5%, making it an attractive option for investors seeking rising dividends.
