Iraq Conflict: The Defense Industry is Set to Soar

While all eyes are on oil when it comes to the Iraq issues, there’s one industry that’s being overlooked.
defense-industryIf nothing else, the continued conflict in Iraq should serve as a reminder there will always be unrest in the world. With that, the defense industry is often overlooked, but it encompasses a suite of businesses that still generate steady levels of cash flows.
What’s more is that the United States has shown a commitment to being a leader among military superpowers. The concerns surrounding defense-spending cuts in the U.S. have diminished. The federal debt ceiling was raised until March 2015. If the Iraqi issues escalate, it’ll just further reinforce the need for a strong defense program.
In the meantime, many of the major defense contractors are offering attractive yields in a low-rate environment.

Profit from the Iraq Conflict with These 3 Stocks

1. General Dynamics (NYSE: GD)

By revenues, General Dynamics is the third largest defense contractor in the U.S. General Dynamics has a strong backlog; as of the end of the first quarter, the company boasted a strong $56 billion backlog. That’s up 10% year over year and is 1.8 times its trailing twelve-month revenues. Earlier this year the company also landed a record $17.6 billion navy contract. It’s one of only two contractors able to build nuclear-powered submarines.
General Dynamics has the least exposure to the U.S. defense budget of the three stocks listed; only generating 60% of revenues from the U.S. government. General Dynamics is the maker of Gulfstream aircrafts, which are one of the most popular business jets in the world. This part of General Dynamics’ business should gain strength on the back of a rebounding economy.
General Dynamics offers a 2.1% dividend yield, compared to the 1.5% industry average. It has managed to boost its dividend payment by an annualized 9% over the last five years. Its 10.7% quarterly dividend payment increase back in May marked its seventeenth straight increase.

2. Raytheon (NYSE: RTN)

Unlike General Dynamics, Raytheon gets around 75% of its revenues from the U.S. military. Raytheon is focused on tech innovations to help drive future growth. This includes intelligence and surveillance. The company has been selected for the Navy’s Air and Missile Defense Radar program. As part of this, it’s building a ground-based missile-defense system.
Raytheon also offers a 2.6% dividend yield. Its payout ratio is only 34% and roughly cash covers 16% of Raytheon’s market cap. This defense company also trades the cheapest of the three at a P/E of 14.5.

3. Lockheed Martin (NYSE: LMT)

Last, but not least, is the world’s largest defense contractor. This company makes the very popular F-35 fighter jets. This pricey machine saw little impact during the defense budget cut concerns in 2013. It has proved to be a must-have item and Congress recently backed a bill for nearly 70 F-35s to be delivered through 2016.
Its F-35 accounted for nearly 16% of its total revenues during the first quarter. Lockheed Martin is also becoming more of an international company. Its sales to international customers are expected to hit 20% of total sales in 2014, up from 17% in 2013.
Lockheed Martin offers a 3.3% dividend yield and happens to one of those dividend stocks you can own forever. It has one of the best returns on investment in the industry — coming in at nearly 30% over the trailing twelve months.
It’s also returning cash to shareholders via buybacks. During the first quarter, it bought up $1.1 billion in shares, compared to the $444 million it paid out in dividends.
These stocks might just be the most underrated investments in the market when it comes to benefiting from the Iraq crisis. They all pay solid dividend yields and are well positioned to continue growing revenues thanks to the United States’ commitment defense.

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