The stock market was already off to a rough start in 2022 when Russia declared war on Ukraine, which made matters worse.
Rising inflation, higher interest rates, the lingering pandemic, and the conflict in Ukraine have collectively made investors nervous. Although defense stocks were not on many investors’ radars, they are now. A Bank of America analyst, Ronald Epstein, predicts that the U.S. national defense budget could reach $800 billion for FY 2023, creating opportunities for defense companies.
To protect your portfolio in 2022, you may want to consider some of the top defense stocks, including these three.
1. Raytheon Technologies Corp.
In 2020, Raytheon and United Technologies merged to create Raytheon Technologies (NASDAQ: RTX).
This defense and aerospace stock is exposed not only to the Russia-Ukraine conflict but is also positioned to benefit from the commercial aerospace market, delivering narrow-body and GTF engines.
RTX has a wide breadth of products to meet the needs of the Department of Defense, including missile defense, hypersonics, and cybersecurity.
Financially speaking, it has enviable cash flow. The company’s 2025 free cash flow target is $10 billion. It will rely on solid growth in its commercial aerospace businesses to hit this target, supported by its ongoing defense revenue streams. For example, Pratt & Whitney and Collins Aerospace are core focuses for aerospace, while Raytheon Intelligence & Space (RIS) and Raytheon Missiles & Defense (RMD) are the primary defense businesses.
RTX reported strong fourth-quarter earnings, which explains why Wall Street analysts’ consensus estimate is a Strong Buy. The share price is trending in the right direction too. At the time of research, RTX stock had risen by over 22% in the past year.
2. General Dynamics Corporation
General Dynamics Corporation (NASDAQ: GD) makes a range of vehicles and systems for the United States military yet has a corporate presence in more than 70 other countries.
Last month, the U.S. State Department approved the sale of 250 M1A2 SEPv3 main battle tanks (MBTs) for $6 billion. These MBTs were sent to Poland. Analysts believe that other Eastern European countries, including Romania and the Czech Republic, may also upgrade their tank defenses in response to Russia’s invasion.
GD has a strong balance sheet that should drive dividend growth. The company offers a quarterly payout of $1.26, representing a 2.1% dividend yield.
GD’s share price has increased by over 30% in the past year as capital flows have moved away from high growth stocks into defense sector.
Like Raytheon, General Dynamics Corporation has plenty of cash flow and is poised to benefit from increased aerospace demand, making GD both an attractive medium- and long-term investment.
3. Lockheed Martin
Lockheed Martin (NASDAQ: LMT) features a broad portfolio covering arms, defense, aerospace, information security, and technology.
Like other defense contractors, Lockheed presents at first glance a similar risk-return profile. But Lockheed may entice more income-oriented investors due to the company’s high quarterly dividend yield, which is currently $2.80, translating to a 2.55% yield, almost double Northrop Grumman’s dividend yield. And Lockheed has a strong dividend history, increasing the payout amount annually.
LMT’s revenue is expanding at an average rate of 10% per year. In its four primary business segments, Aviation, missiles, rotary systems, and space contribute 40%, 17%, 25%, and 18% of the total revenues, respectively.
Recent acquisitions and partnerships will encourage future growth and drive strong momentum. For example, Lockheed recently collaborated with Amazon and Cisco Systems to implement human-machine interface technologies into NASA’s Orion ship.
Should You Buy Defense Stocks?
A diverse customer mix is a pre-requisite for most savvy investors. That is a sticking point when it comes to defense companies. After all, the bulk of their revenues comes from one customer — the United States government. If there is one customer that will reliably increase defense budgets yearly, however, it is the US government if history is a predictor.
With or without war, the stocks on this list have merit. Certainly, they profit from war, but they also have exposure beyond missiles, jet fighters and tanks. Lockheed has aviation and space, Raytheon has aerospace and electronics, while General Dynamics has shipbuilding and defense IT.
Taking a defensive position for your portfolio, it makes sense to include some defense stocks. If war escalates they are likely to offset other stocks that may suffer so they offer a natural balancing.
Not sure what defense stock to buy? You can also buy into one of three primary ETFs that focus on defense:
- Invesco Aerospace & Defense (NASDAQ: PPA)
- SPDR S&P Aerospace & Defense (NASDAQ: XAR)
- iShares U.S. Aerospace & Defense (NASDAQ: ITA)