The world is a dangerous place, to put it mildly. From terrorist attacks in Paris to North Korea’s recent proclamation that they have a hydrogen bomb, violence seems to be all around us these days. There’s always a threat somewhere and need for newer, better and deadlier military hardware in order to keep the peace continues to grow.
Which is why defense stocks still make a lot of sense for investors.
And despite the bipartisan brinkmanship that comes along with the mega-U.S. defense budget, the aerospace and defense stocks should continue to do well over the longer haul as they’ve continue to branch out away from the U.S. government.
Today, many defense stocks find plenty of buyers in private companies and foreign governments for their products. New avenues for growth — such as cyber and grid security — have taken precedence over simply supplying missiles and warships.
Most of the largest defense firms aren’t just a one-trick ponies anymore. That will suit them well as conflict continues to grow across the planet.
In the meantime, investors can be treated to steady cash flows — thanks to multiyear contracts — and steady dividend growth.
Here are five defense stocks to buy today.
Defense Stocks to Buy Today: Lockheed Martin Corporation (LMT)
If you’re going to look at one defense stock, it has to be Lockheed Martin Corporation (LMT).
As one of the biggest one the block, it has its hands in everything from protecting utilities information systems to warplanes. But as one of the biggest, LMT is certainly not a lumbering behemoth. Lockheed still has plenty of growth under its wings.
To start with, the company continues to score big contracts with the U.S. and foreign governments. The latest was one with the Missile Defense Agency for $528 million. These contracts still provide plenty of cash-flow growth.
As will its recent purchase of Sikorsky Aircrafts from United Technologies Corporation (UTX). Sikorsky is the go-to name in military and personal helicopters. The acquisition was basically a bolt-on for LMT.
Secondly, LMT continues to move into less hardware-specific areas and into more data science and network protection. Cybersecurity and making sure the cloud is safe are already becoming a huge moneymaker for smaller firms. As the number one provider of IT for the Federal government, Lockheed is almost assured of a steady diet of cybersecurity dollars.
And LMT has been pretty good at returning those cash flows and contract wins into big dividends for investors. It has managed to grow its dividend more than 800% since 1995.
Defense Stocks to Buy Today: L-3 Communications Holdings (LLL)
L-3 Communications Holdings (LLL) is often ignored by investors looking at defense stocks, and that’s kind of a shame. LLL could be one of the best buys.
Historically, LLL has been a supplier of secure communication systems and specialized communication products for airplanes. That bread-n-butter is still there and provides the bulk of LLL’s profits and long-term contracts from the U.S. and foreign governments.
However, L-3 is undergoing a makeover designed to provide it with more growth down the road.
That’s included a hefty bet on Intelligence, Surveillance & Reconnaissance (ISR) applications. That’s a fancy way of saying “spy equipment.” This included buying smaller private firm ForceX back in October. The deal will add a host of ISR software and sensor products into LLL’s arsenal and help strengthen that focus on spy games.
Also helping is its announced sale of its poorly performing National Security operations to CACI International (CACI). That will rid L-3 of junk made for agencies like the TSA and help it become a focused spy operator.
With intelligence speed being a key determiner of who wins conflicts, LLL should continue to do well over the longer haul.
Defense Stocks to Buy Today: Booz Allen Hamilton Holding Corporation (BAH)
Some of the most profitable defense stocks aren’t the ones that build bombs or tanks, but those that provide consulting services. And one of the biggest is Booz Allen Hamilton Holding Corporation (BAH).
Basically, when the U.S. needs help on a project — whether that be designing a new lightweight gun scope or figuring out better logistics solutions for moving injured troops — they give BAH a call. Booz will then help design, engineer or run a study to help them out.
Additionally, BAH has a whole suite of software for a variety of defense and cybersecurity applications. The beauty in all of this is that BAH has really fat margins because its costs are basically its employees. It has also helped BAH see some pretty big profits since its IPO back in 2010.
As for growth, last quarter BAH reported a record backlog of new contracts and has recently gone on a mergers and acquisitions binge by buying smaller private rivals. Those deals are designed to be instantly accreditive to its bottom line, and the large backlog will continue to provide ample cash flows for years to come.
When it comes defense stocks, BAH maybe one of the best players to buy.
Defense Stocks to Buy Today: Raytheon Company (RTN)
We already know how bad cyberthreats are and how many attacks our information systems see each day. The actual number is mind boggling, which is why there is such an onus on protecting our computer systems.
Raytheon Company (RTN) is quickly becoming the defense stock focusing on that threat.
RTN still provides plenty of defense hardware, surface-to-air weapons — it makes Tomahawk and Patriot missiles — and other command, control and senor products. But the firm has moved head-first into cyber and electronic warfare. That includes beefing up divisions in stealth applications and rolling out a whole host of cybersecurity software and hardware to prevent hackers, worms and other threats.
Even better is that RTN has begun to sell these products to various banks, retailers and other private firms in the wake of several high-profile hacking attacks. This should help Raytheon move beyond being strictly reliant on U.S. government spending. It also helps RTH become less of a straight-and-narrow defense stock and more of a tech play.
For investors, that focus on cyber-crime could result in a higher multiple down the road. As they wait, RTN still has plenty of cash flows and a big 2.2% dividend.
Defense Stocks to Buy Today: iShares U.S. Aerospace & Def. ETF (ITA)
Perhaps the best strategy for defense stocks could be to buy them all. And the best way is through the iShares U.S. Aerospace & Def. ETF (ITA).
ITA tracks the Dow Jones U.S. Select Aerospace & Defense Index — which is made up of all the defense stocks in the U.S. That includes all of the firms on this list, as well as other defense stocks such as Boeing (BA) and General Dynamics Corporation (GD).
The real beauty of ITA is that it includes plenty of smaller and mid-sized defense contractors and hardware producers. These firms often only have a few product lines, so it makes them risky to own by themselves, as the ending of a contract can spell doom. However, they do offer plenty of growth and capital appreciation as M&A targets or in a major contract win scenario.
By using ITA you get them all, as well as the established defense stock players.
In terms of returns, ITA has been pretty decent. As of the end of the year, the ETF has managed to produce an average annual return of 10.42% since its inception in 2006. The combination of big and small firms and rising spending has been its tailwind.
Expenses for the ETF run a cheap 0.43%, or $43 per $10,000 invested.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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