- Lockheed Martin (LMT) — Its a dividend aristocrat, with the best dividend track record in the industry
- Northrop Grumman (NOC) — With the most tech exposure in the industry, it has perhaps the best growth runway ahead
- Raytheon Technologies (RTX) — It has the most stable business due to its consistent and enormous defense backlog
Defense stocks have been on the move since the start of the year, but the war in Ukraine has taken things up a notch or two. Naturally, interest in defense stocks has increased substantially amidst the likely increase in military spending in the Western world.
The United States and its allies in Europe will bump their military spending in the coming months. The Pentagon has already requested President Joe Biden’s administration to hike the military budget to a whopping $773 billion next year, a 4.4% increase from 2022. Moreover, Germany also announced a $112 billion increase in its defense budget. Most NATO European members will be looking to increase their defense budget to 2% of their gross domestic product (GDP) by 2024.
The top exchange-traded funds (ETFs) tracking defense stocks are also climbing. For instance, the iShares U.S. Aerospace & Defense ETF (BATS:ITA) has been up to over 8% since the beginning of the year.
Let’s look at three of the most promising defense stocks you should add to your portfolio:
Lockheed Martin (LMT)
Lockheed Martin (NYSE:LMT) is a leading defense contractor engaged in designing, producing, and disseminating advanced technology systems. Its effective capital allocation has expanded its top and bottom lines at a robust pace while maintaining a sound balance sheet. Moreover, it’s been a cash-flow generating machine and returned more than 75% of its operating cash flows to its shareholders.
Last year, Lockheed generated a healthy $67 billion in revenues, representing 2.5% growth on a year-over-year basis. Moreover, it’s done so with an attractive EBITDA margin of over 13.4%. It expects to generate a massive $26.1 billion in cash flows from 2021 to 2023, which is almost $1 billion higher than its previous estimates.
Furthermore, the company has been a dividend aristocrat in its industry. Last year, it paid out an incredible $2.9 billion in dividends and bought back $4.1 billion in common shares. Moreover, it offers an industry-leading dividend yield of 2.5%, with 20 years of dividend growth.
Northrop Grumman (NOC)
Northrop Grumman is one of the few big names in the defense sector, always flying under the radar. Its products aren’t as ‘out there’ as perhaps Lockheed with its F-16s and whatnot.
However, it is engaged in multiple top-tier defense projects and is involved in some of the most promising growth verticals in the industry. These areas include space hardware, hypersonics, computing, aeronautics, and others. Additionally, it has the most tech exposure compared to its peers, perhaps critical in the current defense environment.
Last year, the company generated $3.1 billion in adjusted free cash flows with a levered FCF yield of over 18%. As we advance, the business is in an incredible spot to generate cash flows at an impressive pace to boost dividends and buybacks. It boasts an excellent dividend profile, which shows 17 years of consistent growth. Investors with a long-term horizon are likely to end up with strong capital gains and impressive yields.
Additionally, with the macro-economic tailwinds in its niche, it could be looking at multiple bumper years of growth ahead.
Raytheon Technologies (RTX)
Raytheon Technology Corporation is one of the top defense contractors in the world, developing cutting-edge commercial and military systems. Its business is coming off an exceptional year of spectacular top and bottom-line growth and free cash flow expansion. Also, it generated colossal free cash flows last year with robust backlogs. Its future outlook remains highly encouraging, with consistent growth expected across its commercial and defense segments.
One of the main strengths of Raytheon is the stability of its business. Its defense segment is a major beneficiary of the U.S. government’s stupendous military spending. At the conclusion of 2021, its defense backlog closed at $63 billion. As we advance, its management expects sales to fall between $68.5 billion to $69.5 billion, representing 7% to 9% sales growth. Moreover, they expect free cash flows to be at $6 billion, a $1 billion bump from last year.
On the date of publication, Muslim Farooque did not have (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