The defense sector is a good place for investors who are looking for both growth and value. While it's not one of the entitlement programs that take up a significant part of the Federal budget, it's not an insignificant line item.
That's important to remember when you hear that the Congressional Budget Office projects defense spending will decrease from 2.9% of GDP to 2.5% in the next 10 years. However, in terms of absolute dollars, the amount spent on defense will continue to be around, or even surpass, the $767 billion spent on defense in 2023.
How could it not? No matter who wins the election in 2024, the current geopolitical climate has the government on the hook for wars on two fronts.
Fortunately, many of the stocks in the defense sector are among the bluest of blue-chip stocks - meaning they give investors reasonable expectations for capital appreciation and solid dividend growth.
Quick Links
- Lockheed Martin
- Northrop Grumman
- General Dynamics
- RTX
- Leidos Holdings
- Palantir Technologies
- SPDR S&P Aerospace & Defense ETF
#1 - Lockheed Martin (NYSE:LMT)
Lockheed Martin Corp. (NYSE: LMT) is at the top of our list because it may be the pre-eminent defense contractor. Specifically, the world’s third-largest aerospace company receives approximately 10% of Pentagon spending, and 50% of its annual revenue comes from the U.S. Department of Defense (DOD).
A significant portion of that business comes via the F-35 program. Lockheed describes this program as The Centerpiece of 21st Century Global Security. That should help ensure investors have decades of revenue and earnings stability.
LMT stock has increased 28.8% in the last five years. However, factoring in Lockheed’s dividend (which the company has increased for 21 consecutive years) brings the total return on the stock during that time to 48.4%. That means $10,000 invested in LMT stock five years ago would now be worth $14,480.
Critics may point to a decline in the rate at which Lockheed has increased its dividend in the last few years. That is due to less free cash flow as the company invests in growth through the F-35 program and other initiatives. While traders may be inclined to stay away, the company remains a solid buy-and-hold for long-term investors.
About Lockheed Martin
Lockheed Martin Corporation, a security and aerospace company, engages in the research, design, development, manufacture, integration, and sustainment of technology systems, products, and services worldwide. The company operates through Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space segments.
Read More - Current Price
- $466.44
- Consensus Rating
- Hold
- Ratings Breakdown
- 3 Buy Ratings, 6 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $485.40 (4.1% Upside)
#2 - Northrop Grumman (NYSE:NOC)
Northrop Grumman Corp. (NYSE: NOC) is another large-cap defense stock to consider as a long-term investment. In 2024, the company’s stock is down more than 6%. Investors may be spooked that the company recently warned Arizona of potential job cuts in the state.
While no specific reason was given for the possible 543 job cuts, Northrop was not selected for a $17 billion contract with the U.S. Missile Defense Agency. However, it’s important to note that this falls under the company’s Defense Systems vertical, which is responsible for the smallest part of its revenue.
NOC stock has not been a stellar performer in the last 12 months, with a negative total return of 2.05%. However, over the last five years, the company has delivered a total return of 46.82%, on par with Lockheed Martin. And with 20 consecutive years of dividend increases, Northrop Grumman still looks like an enticing stock for the long haul.
About Northrop Grumman
Northrop Grumman Corporation operates as an aerospace and defense technology company in the United States, Asia/Pacific, Europe, and internationally. The company's Aeronautics Systems segment designs, develops, manufactures, integrates, and sustains aircraft systems. This segment also offers unmanned autonomous aircraft systems, including high-altitude long-endurance strategic ISR systems and vertical take-off and landing tactical ISR systems; and strategic long-range strike aircraft, tactical fighter and air dominance aircraft, and airborne battle management and command and control systems.
Read More - Current Price
- $435.00
- Consensus Rating
- Hold
- Ratings Breakdown
- 5 Buy Ratings, 8 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $510.36 (17.3% Upside)
#3 - General Dynamics (NYSE:GD)
General Dynamics Corp. (NYSE: GD) is one of the aerospace and defense companies that’s been least affected by the current debate over the defense budget. Even though earnings have missed analysts’ estimates by a few cents in the last two quarters, General Dynamics is still posting higher year-over-year numbers on the top and bottom lines.
The stock price has increased over 38% in the last 12 months, and the total return for GD stock has been over 42% in that time. That makes it one of the market’s best-performing stocks. Over the last five years, GD has had an impressive 85.99% total return.
Despite all that growth, investors can still buy General Dynamics for about 20x forward earnings, which is an attractive valuation, even if they may be paying a slight premium for the stock.
That seems to be the sentiment of analysts who continue to bid GD stock higher. On June 26, 2024, an analyst from BTIG Research initiated coverage with a Buy rating and a $345 price target.
About General Dynamics
General Dynamics Corporation operates as an aerospace and defense company worldwide. It operates through four segments: Aerospace, Marine Systems, Combat Systems, and Technologies. The Aerospace segment produces and sells business jets; and offers aircraft maintenance and repair, management, aircraft-on-ground support and completion, charter, staffing, and fixed-base operator services.
Read More - Current Price
- $287.89
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 11 Buy Ratings, 5 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $303.24 (5.3% Upside)
#4 - RTX (NYSE:RTX)
Formerly known as Raytheon Technologies, RTX Co. (NYSE: RTX) is the company behind products such as the Patriot missile system and Stinger and Javelin missiles.
The current geopolitical environment is a significant reason for the company's backlog of approximately $200 billion. Investors should be able to count on the company continuing to deliver revenue and earnings that are higher year-over-year.
But with RTX stock up 19.5% in the first half of 2024, is it a good buy heading into the second half? The RTX analyst forecasts on MarketBeat give the stock a consensus Hold rating and a price target of around $98.
That said, on May 17, 2024, Wells Fargo raised its price target for the stock from $119 to $145, a 35% gain. RTX cut its dividend in 2020 but has increased it every year since, contributing to the 53.9% total return that investors have received over the last five years.
About RTX
RTX Corporation, an aerospace and defense company, provides systems and services for the commercial, military, and government customers in the United States and internationally. It operates through three segments: Collins Aerospace, Pratt & Whitney, and Raytheon. The Collins Aerospace Systems segment offers aerospace and defense products, and aftermarket service solutions for civil and military aircraft manufacturers and commercial airlines, as well as regional, business, and general aviation, defense, and commercial space operations.
Read More - Current Price
- $99.55
- Consensus Rating
- Hold
- Ratings Breakdown
- 4 Buy Ratings, 11 Hold Ratings, 2 Sell Ratings.
- Consensus Price Target
- $98.33 (1.2% Downside)
#5 - Leidos Holdings (NYSE:LDOS)
Leidos Holdings Inc. (NYSE: LDOS) is another defense stock with a significant presence in the space economy. However, one reason investors may want to consider Leidos in 2024 is the company’s $738 million contract to provide cybersecurity and IT support for the U.S. Air Force.
LDOS stock is up 35% so far in 2024 and up 69% in the last 12 months. It’s trading at the top of its 52-week range, and the stock has generated a total return of over 100% in the last five years. The most impressive part of that growth is that it comes with a dividend yielding around 1%.
That’s to say, if you’re looking at LDOS stock as a trade, you’ll want to wait for a pullback. That could change, however, when the company reports earnings on July 30, 2024. Since its previous earnings report in April, four analysts have increased their price targets to levels significantly above the stock’s consensus price of $146.08.
About Leidos
Leidos Holdings, Inc, together with its subsidiaries, provides services and solutions in the defense, intelligence, civil, and health markets in the United States and internationally. The company operates through Defense Solutions, Civil, and Health segments. The Defense Solutions segment offers national security solutions and systems for air, land, sea, space, and cyberspace for the U.S.
Read More - Current Price
- $145.56
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 10 Buy Ratings, 2 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $146.08 (0.4% Upside)
#6 - Palantir Technologies (NYSE:PLTR)
Palantir Technologies Inc. (NYSE: PLTR) isn’t a pure-play defense stock. However, the company’s data analysis and software platforms operate at a key intersection between the public and private sectors. For the better part of 10 years, the defense sector has said that software, including the application of artificial intelligence (AI), will determine the outcome of future wars.
Approximately 53% of Palantir’s revenue comes from U.S. government contracts, a substantial portion of which are related to the military and defense. The company’s Gotham software platform is being used by U.S. government agencies to help with pattern identification in highly complex datasets. It also facilitates collaboration between analysts and operators.
PLTR stock is up 67% in the 12 months ending June 27, 2024. And it’s up approximately 42% through the first half of 2024. With that said, there’s significant concern over the stock’s current valuation. However, for investors with a long-term outlook, Palantir is worth a hard look.
About Palantir Technologies
Palantir Technologies Inc builds and deploys software platforms for the intelligence community to assist in counterterrorism investigations and operations in the United States, the United Kingdom, and internationally. The company provides Palantir Gotham, a software platform which enables users to identify patterns hidden deep within datasets, ranging from signals intelligence sources to reports from confidential informants, as well as facilitates the handoff between analysts and operational users, helping operators plan and execute real-world responses to threats that have been identified within the platform.
Read More - Current Price
- $25.88
- Consensus Rating
- Reduce
- Ratings Breakdown
- 4 Buy Ratings, 5 Hold Ratings, 6 Sell Ratings.
- Consensus Price Target
- $21.25 (17.9% Downside)
#7 - SPDR S&P Aerospace & Defense ETF (NYSEARCA:XAR)
Exchange-traded funds (ETFs) are solid choices for investors who want diversified exposure to a sector. When it comes to defense stocks, the SPDR S&P Aerospace & Defense ETF (NYSE: XAR) is a solid choice. This is an equal-weight fund, meaning that none of the holdings is more than 4.98% of the total fund’s weight, which helps hedge against risk.
As of June 2024, the fund had 34 holdings, many of which are large caps. But it also has some speculative plays, such as Archer Aviation Inc. (NYSE: ACHR), a leader in the emerging eVTOL (electric vertical take-off and landing) vehicles. The fund also provides exposure to the emerging space economy, which could be positive or negative, depending on your risk tolerance.
The XAR has $2.12 billion of assets under management, and the expense ratio, which has been above 0.5% in the past, is now around 0.38% and more attractive to investors.
About SPDR S&P Aerospace & Defense ETF
The SPDR S&P Aerospace & Defense ETF (XAR) is an exchange-traded fund that mostly invests in industrials equity. The fund tracks an equal-weighted index of US aerospace & defense companies. XAR was launched on Sep 28, 2011 and is managed by State Street.
- Current Price
- $139.10
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 2 Buy Ratings, 6 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $163.61 (17.6% Upside)
As we mentioned, defense spending makes up a significant part of the federal budget in both wartime and peacetime. This brings to mind another exceptional reason to own defense stocks: they serve as a great hedge that can mitigate risk.
That's because our government's consistent defense spending makes defense stocks defensive in nature. When the market is growing, these stocks may not deliver market-beating performance. But during pullbacks, they can put a floor on your losses.
Whether or not you approve of the amount our country spends on national (and international) defense, it's not going away. And no matter who wins in November, those dollars spent are set to increase.
Your only decision is if you want to participate from an investment perspective. And MarketBeat is with you every step of the way, with tools like instant alerts on news that impact the stocks - defense or otherwise - on your watchlist.
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