The stock market as a whole has struggled to start 2016. The S&P 500 index is virtually flat year-to-date. But defense stocks have thrived over the past several years.
The defense industry – led by Lockheed Martin (NYSE: LMT), Northrop Grumman (NYSE: NOC), Raytheon Co. (NYSE: RTN) and General Dynamics (NYSE: GD) – has rewarded shareholders with compelling stock price returns and attractive dividends.
Thanks to the steady expansion of global defense spending, these stocks could continue to fly high moving forward.
Cash Flow Takes Flight
The case for investing in U.S. defense stocks is that they generate large amounts of free cash flow, which they pass through to investors via share buybacks and dividends.
Lockheed Martin is the best-performing stock of the group. While the S&P 500 index is up 64% during the past five years, Lockheed Martin shares are up an astounding 235% in the same time frame.
Lockheed generates huge amounts of cash. Free cash flow totaled $4.1 billion in 2015, up 35% from the previous year. Growth was due to the company’s $9 billion acquisition of the Sikorsky aircraft business last November, as well as continuing success of the company’s flagship F-35 program.
The F-35 stealth fighter has catapulted Lockheed Martin’s aeronautics segment to become a $15.5 billion business by annual revenue. The company received $475 million in additional F-35 production contracts last year, which boosted its aeronautics revenue by 4.3% in 2015. The aeronautics business itself makes up one-third of Lockheed’s total sales, which proves the impact of the F-35 program.
Meanwhile, Northrop Grumman increased diluted earnings per share by 7% last year. The company generated $2 billion of adjusted free cash flow in 2015. It has maintained at least $2 billion in annual free cash flow for the past four years.
Northrop generated a 30% total shareholder return last year.
For its part, Raytheon grew operating cash flow by 13% last year. It produced $23 billion in net sales and $3 billion in operating profit.
Raytheon’s plan for future growth is geared toward expanding into new markets. Last year, 31% of its net sales were international, which was a record high for the company. International business comprised 34% of its 2015 year-end bookings, which indicates further growth in international regions.
General Dynamics’ revenue was up 2% in 2015, thanks to growth in both its aerospace and defense businesses. The company set a record last year for operating margins and diluted earnings per share.
Lockheed Martin, General Dynamics, Raytheon and Northrop Grumman have beaten the S&P 500 index in the trailing one-, two- five-year periods.
And this doesn’t even include dividends. All four companies offer dividend yields at or above the S&P 500 average yield.
Lockheed Martin bumped up its dividend 10% in September. Its dividend yield of 2.6% is higher than its peer group. When it increased its dividend it also announced a new $3 billion share buyback plan.
Raytheon lifted its dividend payout by 10.7% and approved a $2 billion stock buyback last year, raised its dividend 9% this year, and has now increased its payout for the past 12 years in a row. Raytheon’s dividend yields 2.2%.
Northrop Grumman raised its dividend by 14% in 2015. It recently followed up with a 12% dividend hike in June. Its current dividend also yields 2.2%.
General Dynamics offers investors a 2.1% dividend yield – about on par with the S&P 500 – but it recently raised its dividend by 10%.
The bottom line is that global defense spending remains intact throughout the world, and U.S. defense companies are the major beneficiaries. Investors may want to put these four defense stocks on their radar for a great mix of growth and income.