As the last US base in Iraq closes is it time to sell defense stocks? The US budget is eternally in the red and cuts need to come from somewhere. The US may well reduce troop strength after its nine years in Iraq. Will that translate to less work for and profits for defense stocks? Who are the big defense contractors and how will they fare in the weeks, months, and years ahead? Household names, at least in defense circles, are Raytheon, Northrup Grumman, Lockheed Martin, and Boeing. What makes you a successful investor is the ability to see things coming. Any of these stocks may be great for the long run but any or all may take a hit if congress cuts the defense budget.
If it is time to sell defense stocks let’s begin with a little fundamental analysis of the big ones. Lockheed Martin LTM has traded between $66 and $82 a share for the last year. It pays a $4 a year dividend returning just over 5% at the current share price. The company makes fighter planes and missiles, guidance systems and troop transports, as well as other miscellaneous hardware and systems. Just over a forth each of its net sales come from aeronautics, electrical systems, and information systems with just under a fifth coming from space systems. Northrup Grumman NOC has traded between $49 and $72 a share for the last year. The company makes all US aircraft carriers and produced the first stealth aircraft. It makes numerous stealth drones in the RQ series, including the US RQ-170 Sentinel drone that was lost to Iran. NOC makes fighter planes and bombers, provides technical support for the US ballistic missile program, and makes a variety of electronic warfare devices. It pays a $2 dividend which is three and half percent at the current share price. Raytheon has traded between $38 and $53 a share for the last year and pays a $1.72 dividend which is around 4% at the current share price. The company developed the Patriot Missile and profits from developing ground to air missile systems, air interceptor missiles, and allied products such as electronic and radar systems.
If you have stock in and or all of these and have decided that it is time to sell defense stocks look at Boeing. All three of the companies so far are heavily or totally focused on military products. By comparison Boeing makes commercial jets. Boeing BA has traded between $56 and $80 in the last year. It pays a two and a half percent dividend at the current share price. Although Boeing makes a variety of high tech systems including air to air refueling tankers, space systems such as the second stage to the Aires rocket (using space shuttle and Saturn rocket technologies) it caught the news recently with the sale of its first Dreamliner, the Boeing 787. This jet just set distance records for a commercial jet flight. The development of the new, state of the art, 787 gives Boeing a cushion should the congress and the pentagon decide to drastically cut defense spending. All of the stocks we list are dividend stocks but dividends depend upon continued sales. The fact that Boeing has nearly $800 Billion in back orders on the Dreamliner would appear to be insurance in case of a drop in defense spending. If the US does cut defense spending where will it cut? Certainly companies making bullets and other “low tech” products may see a decline in sales. However, the US has gone the way of “smart systems” in gaining intelligence and pursuing its foes. The huge use of unmanned drones is testimony to that. If you think it is time to sell defense stocks it is time to look at the above companies, system by system, and decide where the cuts are likely to come.