I’ve been taking a long, hard look at some defense stocks lately and wondering if they have a spot in my dividend portfolio. There are pros and cons to every business in this universe, but I think some of those of pros/cons are amplified when you are looking at defense stocks.
Let’s take a look at a couple I have my eye on.
Lockheed Martin Corporation (LMT)
Lockheed Martin is the world’s largest defense contractor with 2010 sales of $46 billion. The firm operates in four reporting segments–aeronautics, electronic systems, space systems, and information and global services. Bethesda, Md.-based Lockheed employs 132,000 people.
Fair enough. The biggest thing I take away from Lockheed Martin is that they are the clear leader in their respective industry. Any business that leads their industry usually gets my attention. They are in the business of war, so if that sours your stomach I understand. Certain businesses don’t fit moral criteria for some people. The business of Lockheed does not bug me, so this is a candidate for my dividend portfolio.
They are a cyclical business, and not as steady as a company like McDonald’s or Pepsi, both of whom provide products that people all over the world want on a daily basis. They do have a few weaknesses, and one of them is defense budgets. If the administration that is currently in charge wants to put a serious dent in spending that can affect the Lockheed’s profit. Also, it should be noted that due to the business they are in, large capital expenditures are a norm due to the massive amount of research, development and testing that is needed in this industry. I prefer to invest in companies that don’t need such high capital expenditures, so this is something that does concern me when it comes to investing in defense companies. The defense segment is highly competitive as well.
As far as valuation goes, LMT appears to be attractively priced. They are trading at a 10.94 P/E ratio (per Google Finance), which appears to be an attractive valuation. They have a current yield of 3.73%, which I find to be very attractive. They have grown their dividend for 8 years, and I don’t see any reason why it won’t continue to grow. The payout ratio is at 40% right now, which leaves plenty of room for the dividend to grow.
Raytheon Company (RTN)
Raytheon is a major United States defense contractor with nearly $25 billion in annual sales that operates through six segments: integrated defense systems, intelligence and information, missile systems, network-centric systems, space and airborne systems, and technical services. Sales to the U.S. government account for more than 88% of the company’s total sales. Waltham, Mass., based Raytheon employs 72,000 people.
Raytheon is an interesting company that is making a number of products in the defense space. Where Lockheed primarily concentrates on aircraft and the like, Raytheon produces products that are more on the technical side, like radar, intelligence systems, and missile systems. Some consider Raytheon to be producing products that will be used to engage on the battlefield of the future, where governments and the military rely heavier on technology and unmanned combat. Time will tell if that is true or not. One concern with Raytheon is the fact that one customer (the U.S. government) accounts for such a large percentage of their sales. This is a concern in this segment in general, as most customers of these kinds of products are national governments.
Raytheon appears to be attractively valued right now, with a 10.46 P/E ratio (per Google Finance) and an entry yield of 3.51%. The dividend has grown for 7 years, and I see no signs of that streak ending any time soon. The payout ratio is a lowly 37%, which leaves a lot of space for future dividend hikes.
Overall, I like the valuations of these two defense companies. I would consider both companies as part of my dividend portfolio. I like Lockheed for its aerospace flavor and Raytheon for the tech side. If I was to invest in these companies I would probably split my investments evenly down the middle, as I don’t particularly favor either company. I like both in the defense segment, and these would probably be my only additions in this highly cyclical and competitive segment. I don’t think either should be a cornerstone of a dividend portfolio, but I think that with the attractive valuations, relatively high entry yields, strong product lineup and growing earnings these could be a valuable addition to other core holdings in less cyclical industries.
Things can change on a dime, and defense budgets are always on the tip of the tongue whenever austerity measures or other debt reductions are considered. That is a concern. But, I don’t believe war is going anywhere. Man has been fighting since the dawn of time and I have the opinion that wars will be engaged far into the future. As long as war is being waged, weapons, defense systems, radar, drones, fighter jets, missiles and other products that these two companies produce will be needed.
What about you? Do you have any investments with defense companies?
Thanks for reading.