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[Article revised on June 15, 2017]
The fortune of the defense stocks started looking bright after last year’s U.S. presidential elections. Although globally there are concerns around defense spending, that is not the case with the U.S. right now. On a further positive note, the best stocks in the aerospace and defense sector have a proven track record of steady dividend growth. Dividend increases also seem possible because defense companies continue to generate strong free cash flows, despite moderate topline growth.
The uncertainty around defense budgets under the Obama administration fizzled once President Trump took office. Several major aerospace and defense stocks have performed well since the November election. As a matter of fact, the S&P Aerospace & Defense Select Industry Index is up more than 20% since the election date. In addition, these five aerospace and defense stocks pay solid dividends to shareholders and raise their dividends regularly.
Lockheed Martin (LMT ) generates a great deal of free cash flow and has rewarded investors with dividend growth and stock buybacks over the past several years.
For example, in September 2016, Lockheed Martin raised its quarterly dividend by 10.3%, resulting in a $7.28 annualized dividend. The stock now provides investors with a 2.62% yield, almost thrice that of its sector. On top of that, the company also announced an additional $2 billion stock buyback authorization under its existing program. This still leaves $4.3 billion of the authorized limit for future share repurchases.
Its strict cost controls allow Lockheed Martin to produce high amounts of free cash flow, which then lead to robust dividend growth and stock repurchases. For example, in 2016 Lockheed Martin generated $4.13 billion of free cash flow, down marginally by 0.7% from the previous year. Its dividend cost the company $2.05 billion in 2016, which comes out to a comfortable 50% of the annual free cash flows. This also indicates further room to raise the dividend going forward.
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Boeing (BA) has shifted its focus from defense to commercial aircraft manufacturing. This shift in focus could pay off as the commercial aircraft market is booming. After setting a record of commercial aircraft deliveries in 2015, Boeing barely managed to meet its 2016 delivery targets. Boeing was able to deliver 748 aircrafts during 2016, down by around 1.8% from the previous year. On similar lines, revenues declined by 2% in 2016.
However, the company has been able to improve its free cash flow generation ability year over year. This was evident from the nearly $1 billion increase in this metric in 2016 over the previous year’s figure of around $6.9 billion. This also supports the nearly 30% rise in the quarterly dividend that the company declared last December. On top of that, share repurchase program was renewed to $14 billion. The stock currently yields 2.97%.
Future dividend growth is likely since the company maintains a large backlog of future orders. Boeing ended 2016 with a $416 billion backlog for more than 5,700 airplanes, including $94 billion of net orders during the year.
Raytheon’s Liquid error: internal full-year revenue and diluted earnings per share rose 3.5% and 9.4% respectively, year over year. Revenue rose thanks to strong bookings throughout the year. Raytheon is a strong cash generator and returns cash to investors through both stock buybacks and dividends. The company repurchased $0.9 billion of its own stock last year. Out of the 2015 share repurchase program of $2 billion, the company was yet to utilize $1.6 billion as of December 31, 2016.
In addition, last March the company raised its dividend by 8.87%. This is the 13th consecutive year of dividend increases for Raytheon. Its new annualized dividend comes out to $3.19 per share, which provides a 1.98% yield based on the stock’s most recent closing price.
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General Dynamics (GD ) is vulnerable to declines in global defense spending because it generates approximately 72% of its annual revenue from government defense budgets. Overall, revenue declined by 0.4% in 2016 compared to the previous year. Free cash flows for 2016 also declined by over 6%. However, in absolute terms the company’s $1.8 billion in free cash flows in 2016 was more than enough to cover the approximate $0.9 billion in dividend payout. With dividends representing 50% of the company’s free cash flows, there is room for future dividend growth.
Moreover, General Dynamics has a strong balance sheet. At the end of last year, it held $2.3 billion in cash and equivalents, along with a modest long-term debt to shareholders equity ratio of 27%. Further, General Dynamics announced a 10.5% increase in its quarterly dividend last March. The new dividend rate going forward will be $3.36 per share, which equates to a 1.68% dividend yield based on the stock’s most recent closing price.
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Northrop Grumman’s (NOC ) 2016 sales increased 4.1% from the prior year. At the same time, diluted EPS rose by 17% thanks to 11% increase in net earnings and 6% decrease in the weighted average number of outstanding common shares. On top of that, the company generates a lot of free cash flow – $1.9 billion last year alone, representing a 12% increase over last year. This allows the company to return cash to its shareholders.
Northrop Grumman’s $4 per share annual dividend provides a 1.55% dividend yield. That is a below-average yield, but the stock makes up for this with very high dividend growth. Over the past five years, Northrop Grumman has increased its dividend by around 12% compounded annually. Last month, the company increased its quarterly dividend by 11%, bringing up the annual dividend rate to $4. Due to its low payout ratio of 32.5%, it is likely that the company will continue raising its dividend like the way it has done in the past few years.
With Trump at the head of the administration, national security is likely going to be the top priority of the central government. This should continue to act as a major catalyst for all the five defense stocks. Combine that with the profitable business model and strong balance sheet – dividend investors can expect to see rising dividends in the years ahead.