If you've watched the news lately, you're probably aware that North Korea's supreme military body, the National Defense Commission, has been testing missiles for the express purpose of using them against America. In fact, the Commission stated: "Settling accounts with the U.S. needs to be done with force, not with words, as it regards jungle law as the rule of its survival." While that's probably not going to elicit the warm fuzzies, it's a potent reminder of how important missile defense is. Consequently, this bad news could be good news for the prime players in America's missile defense game.
Nukes mean business
It's no secret that the budget crisis has pushed the Department of Defense, and defense contractors, to tighten their belts in preparation for drastically reduced spending. Plus, with sequestration continuing to hang over their heads, there's fear over which programs will be cut if sequestration does go into effect. One agency that's already seen significant cuts, and is expecting more, is the DoD's Missile Defense Agency, or MDA – $3.6 billion over the next four years, in fact.
However, with North Korea successfully testing intercontinental ballistic missiles, conducting nuclear tests, and moving mobile missile launchers around the country, despite condemnation from the U.N., the U.S., and even its ally China, the threat of an assault against America is proving to be a very real and growing problem.
Stronger defense, please
While this news isn't great, it highlights why a strong missile defense is important. Consequently, it could also spur funding to the MDA, or at least save it from further draconian cuts. That, in turn, would prove beneficial for Northrop Grumman (NYSE:NOC), MDA's prime contractor on the Joint National Integration Center, a simulation and war game center that provides answers to missile defense capabilities. Also receiving benefit would be Boeing (NYSE:BA), the prime contractor on ground-based interceptors, our first line of defense against missiles; Raytheon (NYSE:RTN) which builds the SM-3, a defense weapon used to destroy incoming ballistic missiles; and Lockheed Martin (NYSE:LMT), which builds the Aegis Missile Defense System, the primary sea-based component of the missile defense system.
Best of the best in missile defense
Of all the defense companies listed, my favorite for missile defense is Northrop. Although it's not as big as Boeing or Lockheed, Northrop is leading the Integrated Air and Missile Defense Battle Command System team that "will establish a network-centric systems-of-systems solution for integrating sensors, shooters and battle management, command, control, communications and intelligence systems for Army air and missile defense." Basically, Northrop is making it possible to integrate current, and future, missile defense systems, allowing war fighters greater ease of use. Furthermore, this team has already received the DoD Enterprise Architecture Achievement Award, and in 2011 was awarded with a top-five DoD Program award.
Furthermore, Northrop developed an active electronic scanner array, or AESA, for the Navy's Air and Missile Defense Radar, which it successfully tested in November 2012. This proves that Northrop can develop cost-effective S-band AESA systems that the military approves of. Considering that some companies have a reputation for high-profile cost overruns, and creating more excuses than results – ahem, Boeing's KC-46 tanker and Lockheed's F-35 – it's no surprise that when you combine affordability, products that meet the military's needs, and a reputation for getting the job done, it's a recipe for success. Clearly, Northrop has some skin in the missile defense game, and is sitting pretty to benefit from further missile defense spending.
If the above examples aren't enough to indicate a potentially attractive long-term investment, consider that Northrop also has a strong history of continuously raising its dividend, and right now is sitting at a payout ratio of 28%. Additionally, according to its fourth quarter 2012 report, Northrop repurchased 20.9 million shares, and has a backlog of $40.8 billion, meaning it's not going out of business anytime soon. These are things almost every investor can appreciate.
Look to the future
Government agencies and defense contractors are definitely feeling the pinch when it comes to reduced spending and fears over sequestration. But North Korea's pursuit of expanded missile capabilities is another reminder of why America needs a fully capable missile defense network. Because of that, the prime players in America's missile defense game have job security, even if everything else does go to pot. This makes them great long-term investments.