The defense industry is known for engineering marvels and cutting-edge technology. As an investment, defense stocks tend to be reliable passive income producers thanks to a business cycle that operates somewhat independently from the broader economy.
Lockheed Martin (LMT -0.27%), Raytheon Technologies (RTX -0.18%), and General Dynamics (GD 0.48%) stand out as three defense stocks to buy now. Here's why.
Image source: Getty Images.
A steady business with a growing payout
Daniel Foelber (Lockheed Martin): Lockheed Martin and its defense contractor peers have been in the spotlight due to ongoing geopolitical tensions, particularly in Ukraine. However, Lockheed specifically has been under pressure since reporting disappointing second-quarter financials that showcased margin compression and declining sales and earnings amid what was expected to be a period of growth.
As bad as the earnings report was, it's worth remembering that Lockheed Martin operates a long sales cycle that involves multiyear contracts and a deep backlog of development projects. Therefore, it's better for an investor to focus on the strength of that backlog and its ability to generate growth over time and free cash flow that supports dividend raises.
The investment thesis for Lockheed Martin hasn't changed. It remains an industry leader with a commanding position and a relatively safe business thanks to the dependability of the U.S. government and its allies.
Lockheed Martin has paid and raised its dividend every year since 2003, a time period in which its dividend payout has increased tenfold.
LMT Dividend data by YCharts
For investors looking for a reliable business and a growing dividend, Lockheed Martin and its 2.7% yield may be worth a look.
Raytheon Technologies has long-term growth prospects
Lee Samaha (Raytheon Technologies): It has been an unusual year for the aerospace and defense giant. After a couple of difficult years when the defense side of the business generated the earnings and cash flow to support the company, this was the year when the commercial aerospace business took hold of the growth baton.
However, it hasn't been an easy ride. Raytheon has maintained its full-year guidance for adjusted earnings per share and free cash flow through the year, but it has done so by having to offset significant supply chain challenges.
Raytheon still has a job to meet its guidance in 2022, not least in its Raytheon Missiles & Defense business. Still, the outlook is bright for Raytheon for the next few years. The commercial aerospace business will benefit from an ongoing recovery in the commercial aviation industry.
Meanwhile, the defense business is an obvious beneficiary of a renewed focus on defense spending in light of the conflict in Ukraine. For example, CEO Greg Hayes has previously discussed the potential for replacement demand for Stingers (air defense missiles) and Javelins (anti-tank munitions) in the 2023/2024 time frame.
Everything points to a company with plenty of growth potential in the years ahead.
A noble defense stock that's dedicated to shareholders
Scott Levine (General Dynamics): One of the largest defense companies based on market capitalization, General Dynamics has demonstrated a steadfast commitment to rewarding shareholders with a dividend. In fact, it's the only defense company that's found among the Dividend Aristocrats.
For 25 consecutive years, General Dynamics has raised its distribution to shareholders, and while it's no guarantee that the company will continue raising its dividend in the years to come, it's certainly an encouraging sign.
Another positive sign that dividend hikes may continue is the company's conservative approach to the payout. Over the past five years, General Dynamics has averaged a payout ratio of 36.7%. This suggests management hasn't been willing to jeopardize the company's financial well-being simply to placate shareholders with a hefty dividend. It also suggests that the company -- barring any drastic dips in earnings -- has room to maintain its 25-year streak of boosting its payout.
Prefer to assess the dividend in terms of the company's cash flow instead of its earnings? No problem. In fact, this might prove further that the dividend is in a secure position.
GD Dividend Per Share (Annual) data by YCharts.
Over the past decade, General Dynamics has, without exception, generated free cash flow per share, which far exceeds the dividends per share that it has paid out to investors. With this cash flow generation, General Dynamics is able to fortify its war chest.
Furthermore, General Dynamics has been awarded several contracts in 2022 that bode well for its continued growth. In August, for example, General Dynamics announced that it will deliver 250 M1A2 SEPv3 Abrams main battle tanks to Poland in a deal worth up to $1.1 billion. And earlier this summer, the U.S. Army awarded General Dynamics $1.14 billion to develop a new light tank.
