The aerospace and defense sector may not offer the highest dividend yields or the greatest share appreciation potential, but these companies are often cash cows that trade at reasonable valuations. Seeking out value in this sector involves looking at each company's order backlog as well as the likelihood of its dividend growing. Two companies that look practically identical on paper could be headed in completely different directions, so extensive research is advised!
After some careful digging, I've uncovered two aerospace and defense sector dividends that can be trusted to protect and serve your portfolio, while also digging up one that you may be best off avoiding.
Not only is Raytheon the manufacturer of the military assault missile, the Tomahawk, but it's also producing explosions on the dividend front. Raytheon's dividend has more than doubled since 2004, and the company now bears one of the highest yields in the sector at 3.4%.
Fueling the company's dividend expansion are strong sales in its space and airborne segment, and higher operating margins across the majority of its business segments. Having produced $1.7 billion in operating cash flow in the trailing 12 months and with a payout ratio of just 31%, Raytheon's dividend seems safe, if not conservative, even with growth tapering to 3% in 2012. Normally, this would have been a great spot for Boeing
Like Raytheon, Honeywell has its fingers in nearly every aspect of the aerospace sector. However, unlike Raytheon, Honeywell grew its revenue organically by 11%, causing profits to grow across the board in all four of its business segments in its most recent quarter.
Honeywell's rapid growth is the main reason the company hasn't had its quarterly payout shrink since 1991. Over that time, shareholders have been privy to a 196% jump in the quarterly dividend. Honeywell is currently yielding 2.2%, putting it on par with rival United Technologies
I'm no Dr. Evil, but Alliant Techsystems needs to "throw me a bone!" It's not uncommon for aerospace and defense companies to carry large debt loads, but normally shareholder equity easily outpaces debt -- this isn't the case for Alliant. While competitors Northrup Grumman
Adding insult to injury, in February the company paid out its first-ever quarterly dividend of $0.20. I applaud management for sharing the wealth, but a 2% payout ratio, could they even spare it? The current yield is a meager 1.1%, and revenue is actually expected to contract this year. I can find faster growth with plenty of other names in this sector that have far lower debt levels and significantly higher dividend yields. Alliant Techsystems could be a name to avoid.
Low P/E ratios are a dime a dozen in the aerospace and defense sector. Finding a company that can deliver organic growth while continually rewarding shareholders is what really differentiates the good from the great in this sector. Raytheon and Honeywell appear to be two great companies you can trust to help shoot your portfolio to the moon.
What's your take on the aerospace and defense sector? Share your thoughts on in the comments section below and consider adding Raytheon, Honeywell, and Alliant Techsystems, as well as your own personalized portfolio of stocks to My Watchlist.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of Northrup Grumman, General Dynamics, and Raytheon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that protects and serves its readers.