The defense industry holds a number of appealing stocks for dividend growth investors. Constant geopolitical concerns and rising defense budgets around the world provide a strong backdrop for the biggest defense companies.
The major defense companies have sustainable dividends, even during recessions, due to the persistent need for global defense. In turn, investors have generated strong returns from defense stocks, as well as steady dividend growth each year.
This article will discuss three top defense stocks for dividend growth investors.
Northrop Grumman (NOC)
Northrop Grumman (NYSE:NOC) is a major defense company with four business segments: aeronautics systems (aircraft and UAVs), mission systems (radars, sensors and systems for surveillance and targeting), defense systems (sustainment and modernization, directed energy, tactical weapons), and space systems (missile defense, space systems, hyper-sonics and space launchers). The company generates over $35 billion in annual revenue.
Northrop Grumman’s revenue fell 4% in the most recent quarter, while adjusted earnings per share (EPS) declined 6%. Still, the company remained highly profitable, and future growth is likely as NOC won $13 billion billion in contracts in the second quarter. Its total backlog is at approximately $80 billion, of which $34 billion is currently funded.
For full-year 2022, management expects $36.2 billion to $36.6 billion in revenue, along with adjusted EPS of at least $24.50.
Northrop Grumman’s earnings have increased substantially over time, driven by top-line growth from contract wins, modernization and upgrades, services, and acquisitions. A significant reduction in share count has helped drive EPS gains as well.
Looking forward, the company will achieve both revenue and EPS growth through its involvement in the F-35, B-2, E2-2D, B-21, and space platforms.
Northrop Grumman has paid a growing dividend for 19 years. The payout ratio is currently low at approximately 18% so there is room for further increases. The stock currently yields 1.4%.
Lockheed Martin (LMT)
Lockheed Martin (NYSE:LMT) is the world’s largest defense company and a great pick among dividend stocks. It derives roughly 60% of its revenue from the U.S. Department of Defense. Other U.S. government agencies represent 10% of revenue, with 30% from international clients. The company consists of four business segments. Aeronautics, which produces military aircraft like the F-35, F-22, F-16 and C-130, is the biggest segment at 40% of sales. The rotary and mission systems represents 26% of sales and produces combat ships, naval electronics and helicopters. The company also operates a missiles and fire control business and a space systems segment.
In the second quarter, net sales fell 9%. The quarter was impacted by lower sales in all segments. Still, Lockheed Martin expects annual revenue of $65.25 billion and EPS of $21.55 for the full year.
We expect the company to generate 6% annual EPS growth over the next five years. Lockheed Martin’s backlog is approximately $134.6 billion with an increase in missiles and fire controls, space and rotary, and mission systems. EPS have grown in recent years on the strength of the F-35, tactical and strike missiles, satellite and missile defense programs, and the Sikorsky acquisition. The F-35 is one of the most advanced stealth military aircraft in the world and will likely drive growth for the long term. The Pentagon plans to buy 2,456 F-35s, and this does not include sales to allies.
Lockheed Martin is an entrenched military prime contractor. It produces aircraft and other platforms that serve as the backbone for the U.S. military and other militaries around the world. This leads to a competitive advantage as any new technologies would have to significantly outperform extant platforms. These platforms have decades-long life cycles. Additionally, Lockheed Martin has the expertise and experience to perform sustainment and modernization. These characteristics lead to a good degree of recession resistance.
The company has increased its dividend for 20 consecutive years. The stock currently yields 2.9%.
Raytheon Technologies (RTX)
Raytheon Technologies (NYSE:RTX) was formed after the merger of two previously independent industrial giants, Raytheon and United Technologies. The combined company then spun off Carrier (CARR) and Otis (OTIS), which now trade on their own. Raytheon Technologies is one the largest aerospace and defense companies in the world with $64 billion in 2021 sales.
The company has four segments: Collins Aerospace Systems, Pratt & Whitney, Raytheon Intelligence & Space and Raytheon Missiles & Defense. Raytheon has performed relatively well over the course of 2022 compared to its peers, with steady growth in revenue. For example, last quarter, revenue grew 2.7% to $16.3 billion. Adjusted EPS of $1.16 rose 12.6% year-over-year. Revenue grew 10% and 16% in the Collins Aerospace and Pratt & Whitney segments, respectively.
We expect Raytheon Technologies to grow its EPS by 7% per year over the next five years. The company backlog at the end of the quarter was $161 billion, compared to $154 billion in the 2022 first quarter, of which $96 billion was from commercial aerospace and $65 billion was from defense. Raytheon Technologies reaffirmed prior guidance for 2022, with the company still expecting sales of $67.75 billion to $68.75 billion and adjusted EPS of $4.60 to $4.80.
The company continues to generate growth, which, in turn, means rising dividends for shareholders. In April 2022, Raytheon Technologies increased its quarterly dividend by 8% to 55 cents per share. Both United Technologies and Raytheon have put together solid operating records. In the last decade United Technologies grew EPS by an average rate of 7.2%, while increasing its dividend for 28 years prior to the merger. The stock has a current dividend yield of 2.7%.
On the date of publication, Bob Ciura 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.