7 Defense Stocks That Pay Dividends: Are They a Buy?

Defense stocks - 7 Defense Stocks That Pay Dividends: Are They a Buy?

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They don’t usually attract the attention of retail investors, but defense stocks have risen to popularity and widely outperformed a stuttering stock market so far in 2022. And some of them still appear like good long-term buys, even as they print new all-time highs.

Undoubtedly, ongoing tensions in the South China Sea and the Russian invasion of Ukraine were sure to trigger a rally in defense stocks. No national government would passively wish away (even the imaginary) threats of aggression while watching an ongoing wave of destruction in Ukraine.

As world peace increasingly comes under threat, it’s no surprise that even Japan, a country that once vowed to curtail military expenditure and enjoyed a peace dividend for decades suddenly approved a record $47.2 billion defense budget in December 2021.

Shares in leading defense names were already well primed to rise given increasing defense budgets around the world, and in the United States in particular.

Most noteworthy, after the U.S. defense spending budget reached new highs in 2020, the Department of Defense’s (DOD) discretionary budget authority for the Fiscal Year 2022 of $722 billion was an increase of $17 billion from the Fiscal Year 2021. The Biden Administration reportedly requested $737 billion for DOD in Fiscal Year 2023.

U.S. defense spending is rising, European and Asian governments are spending more too. Therefore, international defense contractors could win bigger contracts and bank huge cash flows over the next few years.

If you’re bullish on the defense industry, here are seven big name defense stocks that pay dividends to check out. Some look like buys right now, and you may want to just watch others for potential buying opportunities this year.

  • Northrop Grumman Corp. (NYSE:NOC)
  • Lockheed Martin Corp. (NYSE:LMT)
  • General Dynamics Corp. (NYSE:GD)
  • Raytheon Technologies Corp. (NYSE:RTX)
  • Booz Allen Hamilton Holding Corp. (NYSE:BAH)
  • L3Harris Technologies (NYSE:LHX)
  • Huntington Ingalls Industries (NYSE:HII)

Let us have a closer look at each.

7 Defense Stocks That Pay Dividends: Northrop Grumman Corporation (NOC)

Szczecin,Poland-January 2022:Northrop Grumman RQ-4 Global Hawk taking off from an airfield equipped with drone control equipment.3D Illustration.
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Defense contracting giant Northrop Grumman keeps appearing on my stock lists this year. It appeared on a low volatility/low Beta stocks-to-buy list recently, and NOC stock tops this list of defense stocks that pay dividends.

Northrop Grumman is a global leader in manned, unmanned aircraft, spacecraft, and missile defense systems. The company won a $1.4 billion low-rate initial contract from the U.S. Army in December last year for an updated battle command system that could be of significant interest to Poland — a NATO member and Ukraine’s neighbor. Successful deliveries in 2022 could induce more interest from European customers.

The company had an order backlog of $76 billion by December 2021 after posting annual revenue of $35.7 billion for 2021 (a 3% organic growth). The defense contractor is in very good shape financially after retiring $2.2 billion of debt last year which earned it a credit rating upgrade from S&P Global in 2021 and another upgrade at Fitch Ratings this month.

NOC stock is a buy in 2022 as the company earns improving profit margins and continues to pursue a shareholder-friendly capital return program.

Northrop returned $4.7 billion to its common stockholders in 2021 via dividends and share repurchases. It increased its quarterly dividend by 8% in 2021 to mark its 18th consecutive year of annual dividend increases.

If all goes well, NOC stock investors could see another $1.5 billion in share repurchases in 2022, and potentially another dividend increase.

The current NOC dividend yields 1.4% annually. The defense stock is up 14% so far this year.

Lockheed Martin (LMT)

An F-16 and an F-35 model at the background, at the Lockheed Martin exhibition stand in Thessaloniki International Fair.
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Lockheed Martin is the world’s largest international defense contractor, and the company has some unique dynamics at play right now.

LMT stock price printed new all-time highs this month as defense stocks surged upon Russia’s attack on Ukraine. Its year-to-date gain of 21.3% is among the best returns on any defense stocks that pay dividends so far this year and gains eclipse industry-focused exchange traded funds (ETFs) by a wide margin.

The negative points against buying LMT stock right now include an estimated 1.4% year-over-year (YOY) revenue decline to $66.1 billion for 2022 following a 2.5% sales growth to $67 billion last year.

That said, Wall Street analysts’ forecasted 6% decline in Lockheed’s normalized net income for 2022. This could still be neutralized by a compensating 16.6% growth in generally accepted accounting principles (GAAP) earnings per share (EPS) for the year as the bottom line recovers from a 2021 drop.

Lockheed Martin’s current quarterly dividend yields 2.6% annually. The company has a new habit of increasing its quarterly dividend by 20 cents once every year. An increase of that magnitude in September this year could raise the yield to a respectable 3% annually.

Most noteworthy, the company had a huge order backlog of over $135 billion by Dec. 31, 2021. It continues to execute a shareholder-friendly capital return policy.

The company generated $9.2 billion in operating cash flow in 2021 from revenue of $67 billion. Returned $7 billion of cash to stockholders including $4.1 billion of share repurchases and $2.94 billion in dividends. Management expects about $8 billion in operating cash flow for 2022 and aims to splash about $4 billion in share repurchases.

Good times could roll for long-term shareholders.

Dividend-Paying Defense Stocks: General Dynamics (GD)

image of General Dynamics (GD) website, representing dividend stocks
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Another titan of the defense industry, General Dynamics, is one of the best dividend-paying defense stocks to watch as it executes for greatness in 2022.

The defense contractor doubles as a business jet manufacturer. Last year, the company received the highest Gulfstream jet orders in more than a decade and its total backlog increased by 40% YOY in the aerospace segment.

Not to be outdone, General Dynamics’ defense segments collectively generated 2021 revenue and operating earnings that were the highest in the company’s history. All its segments are fired-up and that trend could persist into 2022 and beyond.

Of significant interest is GD’s Electric Boat shipyard that builds certain modules and assembles submarines for the U.S. Navy. The service has been buying two submarines a year historically but there is growing pressure on the submarine industrial base to almost double its annual production going forward. The company reported its 17th consecutive quarter of marine systems revenue growth in the fourth quarter of 2021. More financial support is on the way as submarine funding increases in 2022.

The company maintains a favorable capital management policy too. GD generated a record $4.3 billion in operating cash flow in 2021 from annual revenues of $38.5 billion. Management paid dividends of $1.3 billion and repurchased $1.8 billion worth of GD common stock.

General Dynamics announced a 6% dividend increase this month to $1.26 per quarter. The upcoming dividend yields 2.2% annually. Wall Street projects a 7.4% revenue growth and a strong 15.2% increase in EPS in 2023.

Perhaps GD stock price could continue to print new all-time highs. Shares have gained 10% in value so far this year.

GD reported a strong $127.5 billion total contract backlog at the end of 2021.

Raytheon Technologies (RTX)

A booth showcasing various technologies offered by Raytheon.
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Raytheon Technologies is a diversified defense industrial contractor and aerospace stock play that could produce double-digit capital gains for 2022. The company was created after the recent merger between the Raytheon Company and the United Technologies Corporation aerospace business in 2020.

RTX is a dividend-paying defense stock to buy right now as its directed energy defense system against drones and hypersonic missiles becomes a timely offering as war rages in Eastern Europe.

Besides, the company is experiencing a attractive revenue, earnings, and cash flow growth spate. It reported a strong 14% YOY growth in full-year 2021 revenue to $64.4 billion. Operations generated $7.1 billion in cash flow last year and the company repurchased $2.3 billion worth of RTX common stock in 2021.

RTX had a huge order backlog of $156 billion, including a defense backlog of $63 billion and $93 billion from commercial aerospace going into this year.

Management guided for a 7.1% YOY growth in sales this year. And Wall Street analysts project a strong 12.2% growth in RTX’s EPS for 2022.

If plans go well, Raytheon could repurchase at least $2.5 billion worth of RTX common stock in 2022 as it generates another $6 billion in free cash flow.

The current quarterly dividend on RTX stock yields 2.1% per annum. The company has paid a dividend consistently for 86 years now.

Dividend-Paying Defense Stocks: Booz Allen Hamilton (BAH)

Booz Allen Hamilton (BAH) logo on a corporate building
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Investors looking for defense industry stocks that pay growing dividends should check out Booz Allen Hamilton stock first before buying anything else.

Booz Allen Hamilton provides management consulting services to the U.S. government. Its services include cloud computing, cybersecurity, and engineering consulting focused on defense, intelligence, and civil markets.

BAH pays one of the fastest-growing dividends from a defense-related stock at the moment. The company announced a 16% increase to its quarterly dividend in January this year. It has increased its dividend by an average of 21.8% over the past three years.

To show support for its growing dividends, the company announced a 19.2% increase in its order backlog to $27.8 billion as of December 31, 2021.

Although management revised downwards the company’s revenue growth outlook for the Fiscal Year 2022 to an upper range of 7.2% citing budget uncertainties on the U.S. government’s part, such issues are behind the company now.

The Senate passed a full-year $1.5 trillion federal funding bill on March 10 that increased defense funding beyond what the DOD had asked for.

Booz Allen Hamilton stock’s current quarterly dividend yields 2.1% annually. BAH stock price has risen by nearly 12% over the past month as shares recover with better visibility on U.S. spending plans.

 L3Harris Technologies (LHX)

An office building with the logo for L3Harris Industries visible on the building.
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A mid-2019 merger between two defense contractors L3 Technologies and Harris Corporation created L3Harris Technologies, a strong dividend growth stock that investors should check out today.

L3Harris Technologies’ products provide command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR) technologies across space, air, land, sea, and cyber domains.

The company announced a 10% dividend increase in March this year to mark its third double-digit annual dividend raise since the 2019 merger. However, after a three-year average dividend increase of 18.5% per annum, LHX’s dividend still yields just 1.8% as the company’s stock has gained 55% in value over the past three years.

Although a chip supply shortage weighed on sales generated during the past year, net income margins expanded by 430 basis points, and GAAP EPS increased by a staggering 75% in 2021.

One low point to consider is that the company generated $2.7 billion in operating cash flow in 2021 but returned $4,5 billion to investors via share repurchases and dividends. The trend may not be that sustainable as it shrinks cash balances and increases net debt on the balance sheet, thus probably increasing equity risk to LHX sock investors.

That said, Wall Street attaches a 41.8% earnings growth rate on L3Harris Technologies stock right now. High EPS growth could justify expanding valuation multiples while sustained positive free cash flow generation lifts dividend growth prospects and supports share repurchase programs well into the future.

LHX stock price gained 12.1% over the past month.

Dividend-Paying Defense Stocks: Huntington Ingalls Industries (HII)

The Huntington Ingalls logo is displayed on a smartphone screen.
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Huntington Ingalls Industries is the U.S. defense industry’s largest independent military shipbuilder that was spun off from Northrop Grumman. The company produces both nuclear-powered and non-nuclear-powered ships, submarines, and aircraft carriers. Its technical solutions segment produces unmanned undersea vehicles provides Information Technology services to the U.S. government.

HII is busy expanding its industrial base as the U.S. Navy’s demand for sub components increases beyond existing capacity. Its Newport News Shipbuilding yard recently missed two submarine milestones at the end of 2021. Some pressure has been released after a Virginia-class submarine Montana was successfully delivered to the U.S. Navy on March 14.

More money will flow into corporate coffers as annual workloads increase with more congressional support for the industry.

HII stock’s quarterly dividend yields 2.3% annually. The company has increased its annual dividend by an average of 15.3% over the past three years.

In an earnings release in February, management at Huntington Ingalls guided for a potential 13.7% YOY growth in annual revenues this year to over $10.8 billion. Achievement of financial targets this year could mean an additional $300 million to $350 million in free cash flow to support dividend raises in the future.

On the date of publication, Brian Paradza did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Brian Paradza is an investing enthusiast who was awarded the CFA Charter in 2019. A strong believer in fundamentals-based long-term investing, Brian learns from gurus like Warren Buffett but acknowledges human behavioral tendencies that drive short-term “madness”. You may find him inquisitive as he examines tech investing opportunities, cannabis, blockchains, and the new cryptocurrencies asset class.


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