6 Powerful Ways to Invest in Defense

Military spending tends to move steadily higher regardless of the cycles for interest rates and inflation, or the cyclical ups and downs of financial markets. With the additional tailwind of global tensions from North Korea to Ukraine, several contributors to MoneyShow.com, see the defense sector as well-positioned for continued growth. Sean Brodrick, Wealth Megatrends Households and corporations may tighten their belts during periods of economic uncertainty, but you know who likely won't? The U.S. government. It's no secret that geopolitical conflicts are worsening. With Russia and Ukraine at war and China upping its aggression over claims of Taiwan and the South China Sea, I expect countries to increase military spending worldwide. Raytheon Technologies is the largest U.S. defense contractor by market capitalization and the third largest by government contract volume. It operates through its four main subsidiaries: Intelligence & Space, Missiles & Defense, Collins Aerospace and Pratt & Whitney. It merged with United Technologies in April 2020. In FY 2021, 32% of Raytheon's revenues came from defense contracts, logging $20.7 billion in obligations. The steady flow of government contracts decreases its revenue sensitivity and makes it a safer bet in the event of a recession. A worsening economic outlook could hurt Raytheon's commercial business, but the company has a massive $65 billion defense backlog to prioritize if it comes to it. When conflicts in Ukraine broke out, the company recognized it could take advantage. The Javelin missile is one of the bigger reasons why. Raytheon produces the Javelin missile through a joint venture with Lockheed Martin . The U.S. has already provided over 8,500 missile systems to Ukraine. They cost $240,000 per unit, which equates to over $2 billion in aid from Javelins alone! That's not considering other requests and commitments for Stinger missiles, Tomahawk cruise missiles, jammers and more. RTX is undervalued both historically and compared to its peers. The stock's recent price-to-earnings ratio of 17.3x is nowhere near its normal P/E ratio of 27.5x over the past 10 years, and it's well below the peer median of 20.9x. The defense contractor posted mixed results in its Q3 earnings announcement, beating EPS consensus of $1.14 by 6%, but missing revenue projections of $17.2 billion by 2%. Raytheon has eclipsed earnings estimates in 23 consecutive quarters. The dividend yield is 2.3%. Raytheon is predicted to hike its dividend by an average of 8% per year over the next three years. Raytheon could face temporary weakness if the broader market continues struggling but it should see a bounce off support at about $81 per share. The defense contractor is trading well off its March highs, offering the opportunity to enter at bargain basement prices. Mike Cintolo, Cabot Top Ten Trader Northrop Grumman is one of the world's largest defense contractors, providing military aircraft and unmanned aerial vehicles, missile defense technology and rocket launch systems. It has a leading position in aerial drones used in military applications, including the remotely piloted RQ-4 Global Hawk and manned battle management planes like the E-2D Advanced Hawkeye. While the firm's aeronautics segment has historically been a revenue leader, space systems (30% of total revenue) are now Northrop's fastest-growing segment, accounting for nearly half its current backlog of $80 billion. Indeed, management noted that while the the Pentagon's budget has increased by around 5%, NASA's proposed 2023 budget is up nearly twice that amount. To that end, Northrop bought rocket maker Orbital Sciences in 2018 to expand its space systems division, and more recently partnered with Firefly Aerospace to provide an American-built, first-stage upgrade for Northrop's Antares rocket along with a new medium launch vehicle to serve commercial, civil and national security space launch markets. Technically, NOC has been a standout in an otherwise lackluster market environment. The stock spiked after the Russian invasion (war fears), and then hacked around with a slight upward tilt during the next many months. We favor aiming to enter on dips if you want in. Jim Powell, Global Changes & Opportunities Report Beijing and Washington are in fierce competition for military supremacy. So far, the U.S. is ahead of China in most areas -- but China is catching up fast. To maintain its lead, Washington must greatly increase its defense spending -- and do it soon. The necessary funding is starting to be approved. Because China and the U.S. are separated by over 7,400 miles of ocean, any shooting war will rely greatly on naval vessels. Until recently, Beijing emphasized expanding its coastal protection fleet. However, the country is now starting to build a global blue water navy. India reports seeing a sharp increase in the number of Chinese warships in the Indian Ocean. The Chinese Navy is also reaching further into the Pacific Ocean to support its expanding diplomatic and security alliances. A recently signed security agreement with the Solomon Islands took snoozing U.S. and Australian governments by surprise. Several other agreements may be in the works as China challenges nearly 104 years of U.S. dominance in the Pacific. In the U.S., two companies will get the biggest contracts to build the ships and submarines needed to counter the growing Chinese naval threat: Huntington Ingalls and General Dynamics . I have been recommending both companies for long-term investors. John Eade, Argus Research Lockheed Martin Corp. has consistently delivered positive surprises to the Street in recent years, regardless of whether defense spending is rising or falling, or the White House is occupied by a Republican or a Democrat. We have a favorable view of the company's focus on international revenue diversification (now more than 25% of sales) and expect ongoing geopolitical tension to benefit sales and earnings going forward. New management has signaled to Wall Street that near-term earnings growth will slow, though the long-term outlook remains upbeat. Based on recent sales and margin trends, we are resetting our adjusted 2022 EPS estimate to $21.70. Our estimate is slightly above management's guidance. We look for growth to accelerate in 2023 and are maintaining our EPS forecast of $28.50. Our long-term EPS growth rate forecast is 7%, reduced from 10%. Long-term opportunities include the company's hypersonic portfolio, classified activities, programs of record including the CH-53K heavy lift helicopter, F-35 sustainment activity, increased PAC-3 production, and enhancements to the fleet ballistic missile. During this period of limited growth opportunities, the company expects to aggressively repurchase shares. To that end, in October 2022, the board authorized the purchase of up to an additional $14.0 billion of LMT stock. The company plans to execute a $4.0 billion accelerated share repurchase in 4Q22, bringing total repurchases for the year to approximately $8.0 billion. Investors focused only on the short term have thus exited the stock, creating a value opportunity. LMT shares were recently trading at 15-times projected 2023 earnings. On price/sales, the shares are trading above the midpoint of the five-year range of 1.2-1.9. The dividend yield of about 3.0% is also above the five-year average and the market average, signaling value. We are maintaining our target price of $500. Chuck Carlson, DRIP Investor Lockheed put up some nice numbers in the third quarter. Per-share profits of $6.87 beat the consensus analysts' estimate of $6.71. Free cash flow in the quarter was $2.7 billion, up from $1.6 billion in the year-earlier quarter. For 2022 overall, net sales should be in the vicinity of $65.2 billion, with per-share earnings of roughly $25. The stock's P/E ratio based on that 2022 earnings estimate is 18. That seems like a reasonable multiple to pay for a company that is strategically vital to our nation's defense. Long term, Lockheed Martin has plenty of runway for growth. Indeed, the company's backlog at the end of the third quarter was $140 billion. Lockheed is showing confidence in its future, as the firm recently boosted its dividend 7% -- the dividend boost brings the current dividend yield to 2.7% -- while announcing the addition of $14 billion in share-repurchases authority. Please note Lockheed Martin offers a direct-purchase plan whereby any investor may buy the first share and every share directly. Minimum initial investment is $250, although Lockheed will waive the minimum if an investor agrees to automatic monthly investment via electronic debit of a bank account of at least $50. There is no enrollment fee. Full or partial dividend reinvestment is available. Selling fees are $25 plus $0.12 per share. The plan administrator is Computershare. Gavin Graham, Internet Wealth Builder The heightened level of geopolitical tensions in the wake of the Russian invasion of Ukraine has prompted investors to take greater interest in companies in the defense industry. Once companies have been approved as suppliers to the defense department, in whichever country, they tend to remain suppliers for a very long time. Many of the major defense contractors in the US have relationships stretching back to World War II and before. Overall, defense contractors are exceptionally well positioned for years of sustained growth in revenues and earnings, assuming they can keep costs under control. With many contracts on a cost-plus basis, or with some form of inflation provision, defense companies enjoy sustainable high margins and limited competition. The simplest way to gain exposure to the sector is to buy an aerospace and defense ETF. This approach offers wide ranging exposure and avoids any issues arising from delays in a particular program. My choice for a suitable defense fund is the Invesco Aerospace and Defense ETF . The ETF was launched in October 2005. It has $1.6 billion in assets under management (AUM). The largest five holdings are Lockheed Martin (7.2%), Raytheon (7.1%), Northrop Grumman (6.9%), General Dynamics (6.7%), and Boeing (6.4). The management fee is 0.5%, which is reasonable for a specialist ETF. The ETF paid $0.66 in dividends in the last twelve months. Payments are quarterly and variable. The Invesco Aerospace and Defense ETF is suitable for investors comfortable with owning arms manufacturers and willing to accept a relatively low yield. In return, you'll have a position in a wide range of major companies with longstanding relationships with the US and other NATO and allied military forces, at a time when governments have committed to raising the percentage of GDP spent on defense in view of the increased levels of geopolitical uncertainty.

6 Powerful Ways to Invest in Defense

Households and companies may tighten their belts during times of economic uncertainty, but you know who won't? The U.S. government.

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