The world remains a dangerous place and the U.S. taking a leading role in defending it means the Defense Dept. budget will more often than not grow. This year it is expected to be some $817 billion.
The war in Ukraine, for example, has been a delicate balancing act, and would be a catalyst for growth itself for defense contractors as the country's military needed to be modernized, but it has also resulted in the depletion of many critical weapons systems here at home.
The U.S. is encouraging many global customers to ship their munitions to the war-torn country with a promise of new supplies to restock their own armories. So while defense spending doesn't always go up, there's a good argument to make that the next few years in particular will be very good for the industry, and the following pair of defense stocks are my top picks to buy now if you have $100 available to invest.
Image source: Getty Images.
Lockheed Martin
Even though Lockheed Martin (LMT -0.75%) is the largest defense contractor, realizing virtually all of its revenue from government contracts, it still remains subject to market forces that have been hurting small business. The supply chain snarls that have upended retail have also played havoc with Lockheed's business.
That's part of the reason the defense giant says sales will be largely flat in 2023 but will resume growth in 2024. Yet Lockheed says it still expects to deliver "growth in free cash flow per share" this year and beyond as it implements its cost containment program, improves working capital management, and expands its stock buyback program, which it increased to $14 billion last quarter.
Now Goldman Sachs (GS 1.79%) just downgraded Lockheed stock (and many other defense companies) because while the contractor tends to grow in lockstep with the Defense Department budget, it's fearful the government will tackle its massive budget deficit before growing defense spending further, limiting growth opportunities.
Yet Lockheed still has a significant and growing backlog of business, which stood at almost $140 billion at the end of the last quarter. It expects to recognize more than one-third of the total over the next 12 months, and some 55% over the next two years.
Lockheed Martin also pays a generous dividend of $12 per share that currently yields 2.7% annually. It just raised the payout by 7%, and has a record of consistently increasing it over the past 20 years. With a payout ratio of 37%, has both room to grow further and is safe.
While shares trade at almost $450 apiece, buying fractional shares can ensure you can still buy into this behemoth.
Image source: Lockheed Martin.
Raytheon Technologies
The second largest defense contractor, Raytheon Technologies (RTX -0.29%), is actually my best defense stock to buy because it makes most of those weapons systems sales to Ukraine mentioned earlier.
From Stinger and Javelin missiles to high-speed, anti-radiation missiles (HARMS) and National Surface-to-Air Missile Systems (NASAMS), Raytheon has its hand in all of them, not to mention the Patriot missile-defense systems that the U.S. is sending to Ukraine. We're also bringing Ukrainian soldiers to the U.S. to train them on how to use this defense battery.
Raytheon CEO Gregory Hayes recently told the Ronald Reagan Institute that the war in Ukraine has used up 13 years' worth of U.S. Stinger anti-aircraft missiles and five years' worth of Javelin anti-tank missile production. These inventory holes will need to be plugged quickly.
While Goldman Sachs also cut its rating on Raytheon to neutral despite seeing it well positioned in the defense spending end market, analyst Noah Poponak is concerned supply chain issues could still affect its operations this year, which could put the contractor's 2025 goals at risk.
Hayes, however, notes that those are merely short-term concerns and the long-term outlook for Raytheon is quite healthy. He points to the company's balanced defense business and commercial aerospace program, both of which have strong demand tailwinds behind them. He also says Raytheon's backlog of $168 billion continues to grow while it is still investing billions in research and development and capital expenditures.
Raytheon has paid a dividend every year since 1936, when it was United Technologies before the merger, and has increased the payout for more than 25 years. It currently yields 2.2% annually.
There could be a bump or two in the road this year for both defense contractors, but if you have $100 to spend, these could be the best picks you make this year.
