Five Dividend-paying Defense Investments Fueled by Russia’s War

Five dividend-paying defense investments fueled by Russia’s war in the Ukraine have outperformed the market in the past year and are showing no drop off in profiting from international efforts to protect civilians, essential infrastructure and power supplies from shelling, missiles and state-sponsored terrorism.

The five dividend-paying defense investments help the United States and its allies in aiding Ukraine as it seeks to safeguard its citizens from Russia’s military might. China, as the world’s most populous country with the second-largest economy, has been described by top U.S. government officials as America’s biggest military and economic threat, requiring new national security strategies.

The inflow of investment dollars to defense stocks as a means of portfolio protection against large drops in the overall market and the technology sector sell-off has been a major catalyst for “rerating” the sector, according to BofA Global Research. Defense stocks have been fueled by strong support from the U.S. government amid one of the most “geopolitically tense environments” in recent years, BofA added.

R&D Strengthens Five Dividend-paying Defense Investments

In the United States, defense spending has been rising steadily for the last 15 years, to the benefit of both publicly traded and privately held companies. Innovative digital technologies, including advanced metal manufacturing and robotics, have cut production costs and sped up project completion, according to BofA.

Major investments in research and development (R&D) allow defense companies to vertically integrate to gain increased control of their own supply chains. Rising R&D by defense prime contractors also is fortified by funding from the U.S Department of Defense (DoD).

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Five Dividend-paying Defense Investments Intrigue Economist

Mark Skousen, the head of the Forecasts & Strategies investment newsletter and a leader of the Fast Money Alert trading service that invests in stocks and options, queried SpaceX and Tesla (NASDAQ: TSLA) founder Elon Musk at the annual Baron Investment Conference held in New York on Nov. 4. Skousen, who also is a Chapman University Presidential Fellow and recently was named the first Doti-Spogli Chair in Free Enterprise at its Argyros School of Business and Economics, currently is avoiding Tesla due to the stock’s sky-high valuation, even though he has recommended it profitably in the past.

Mark Skousen, a scion of Ben Franklin and head of Fast Money Alert, meets Paul Dykewicz.

Jim Woods, a seasoned investment guru, also is the leader of the Bullseye Stock Trader advisory service that recommends stocks and options. Woods, who concurrently heads the Intelligence Report investment newsletter, is a former Army paratrooper who has strategically invested in defense stocks. Woods recently recommended the stock and options in a big defense stock.

Paul Dykewicz meets with Jim Woods, head of Bullseye Stock Trader.

Skousen and Woods are partners in leading the Fast Money Alert trading service. They combined to produce a short-term gain of nearly 10% with their Oct. 3 recommendation of defense, space and cyber consulting firm Booz Allen Hamilton (NYSE: BAH), of McLean, Virginia. The call options they recommended soared 239.27% in just 28 days before they advised selling.

Leidos Is a Leader Among Five Dividend-paying Defense Investments 

A leader of the defense stocks to assess for investment is Leidos Holdings (NYSE: LDOS), based in Reston, Virginia. Formerly known as Science Applications International Corporation, the company is involved in U.S. defense, aviation, information technology and biomedical research, providing scientific, engineering, systems integration and technical services.

BofA set a price target of $130 on Leidos, with a view that the company should trade in line with the defense prime contractors amid strong U.S. national security demand for innovative technologies and solutions. Other pluses are the company’s solid free cash flow, offset by a lumpy contract award environment, near-term supply chain pressures and mounting concerns about labor inflation.

Risks to reaching the price target are cuts to the U.S. government budget compared to forecasts, increased competition from non-traditional competitors, problems integrating M&A, hiring the right personnel, containing costs, estimating costs and executing on fixed price contracts, as well as retaining reputational risk and future awards.

Outperformance could come from a better-than-anticipated federal budget allocated to innovative technologies and modernization, inexpensive and well integrated M&A activity, unexpected capital return to shareholders in the form of dividends or share buybacks, market share gains, along with better-than-expected margin expansion, BofA wrote.

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Dividend-paying Defense Investments Appeal to Portia Capital

Michelle O’Connell, who leads Dallas-based Portia Capital Management, recommends Leidos as a strong mid-cap defense stock that is not covered as prominently as the large-cap stocks in the industry. The company has a large domestic customer base that produces 90% of its revenues.

Leidos serves the DoD, U.S. intelligence agencies, Department of Homeland Security and the Department of Veteran Affairs. With foreign government revenues currently accounting for less than 10% of the company’s total sales, that segment of the business could present “a great opportunity,” Connell counseled.  The United Kingdom, Germany and other NATO allies are looking at improving their military intelligence and cyber security.

Strong consistent cash-flow generation during the last 10 years has reached at least $500 billion, Connell continued. To fuel future growth, Leidos spent more than $700 million on capital expenditures in 2021. The emphasis on cyber warfare enhances the prospects for this investment.

Connell calculated recent contract wins in December 2022 of $102 million for the U.S. Army and $39 million for the U.S. Air Force. She gives the stock an upside potential of 15%.

General Dynamics Is Among Five Dividend-paying Defense Investments

General Dynamics (NYSE: GD), a global aerospace and defense company based in Reston, Virginia, is another recommendation of BofA. It also is a favorite of Jim Woods for his monthly Intelligence Report investment newsletter. The company produces combat vehicles, nuclear-powered submarines and communications systems to provide safety and security.

Plus, the company’s defense program exposure to land and sea priorities, coupled with its Gulfstream business jet manufacturing segment, could spur near-term and medium-term organic growth. General Dynamics also has a strong balance sheet and solid cash generation, aiding dividend growth and share repurchases, BofA added.

BofA set a price objective of $325 on General Dynamics, noting it faces risks. On the defense side of its business, the risks include possible poor execution on defense programs hurting margins and any U.S. Defense Department budget cutting medium- and long-term growth. General Dynamics rose 21.40% in 2022 but BofA expects further gains in 2023.

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Raytheon Rates as One of Five Dividend-paying Defense Investments

Raytheon Technologies Corp. (NYSE: RTX), of Waltham, Massachusetts, is yet one more buy recommendation among defense stocks followed by BofA. The multinational aerospace and defense conglomerate is one of the largest aerospace, intelligence services and defense manufacturing providers in the world, based on revenue and market capitalization.

BofA gave Raytheon a price target of $120, based partly on a blend of U.S. defense and global commercial aerospace growth. Risks to attaining that price objective are a potential downturn in commercial aviation due to the natural business cycle or an exogenous event such as a terrorist attack or a renewed pandemic threat. A severe global economic slowdown would affect top-line growth, since 45% of sales are generated outside the United States.

Execution risk on defense programs could result in cost overruns and margin contractions, BofA added. Orders from international programs further are difficult to time due to the complexity of the process. Lumpiness can occur with international orders. Another blow could come from unexpected cancellations to military or commercial programs.

Outperformance could come from commercial aerospace and business aviation jet recoveries or earnings beating projections, BofA wrote. If margins fare better than forecast, upside potential could top the investment firm’s current valuation of Raytheon. If Raytheon executes on existing programs better than expected and attains share gains in the international market, the reward could be better-than-anticipated upside in the shares, BofA wrote.

Despite the market falling overall in 2022, Raytheon rose 19.33% for the full year and has the potential to climb further in 2023.

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Two Funds Find Niches Among Five Dividend-paying Defense Investments

Investors who are looking for a diversified portfolio of defense and aerospace stocks have two exchange-traded funds (ETFs) to choose from: Invesco Aerospace & Defense (PPA) and iShares U.S. Aerospace & Defense (ITA). However, the returns between the ETFs have varied considerably in recent years because they track different indexes and can have very varied holdings, said Bob Carlson, a pension fund chairman who also heads the Retirement Watch investment newsletter.

PPA follows the SPADE Defense Index. Recently, the fund held 56 stocks, and its top holdings were Boeing, Raytheon, Lockheed Martin (NYSE: LMT), Northrop Grumman (NYSE: NOC) and General Dynamics. Its 10 largest positions were 56% of the ETF. The ETF is up 10.03% in the last year, as well as 17.47% for the past three months.

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ITA follows the Dow Jones U.S. Select Aerospace & Defense Index. It top holdings recently were Raytheon, Lockheed Martin, Boeing (NYSE: BA), TransDigm (NYSE: TDG) and Northrop Grumman. It held 35 stocks, and the top 10 holdings of the ETF comprised 75% of the portfolio. The ETF also attained an 8.85% return during the past 12 months and a 19.17% jump in the past three months.

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China’s COVID Cases Climb Steeply After Relaxing Zero-Tolerance Policy

The number of COVID-19 cases has reached a record high in mainland China, peaking on Dec. 2, according to the European Centre for Disease Prevention and Control (ECDC). In the past three weeks, the number of cases in China has fallen, likely also due to the conducting of a reduced number of tests to detect cases.

The U.S. government will require mandatory negative tests starting Thursday, Jan. 5, for all passengers seeking to enter the country from China, after the latter country reported a spike in COVID-19 cases last month. France and several other countries also mandated clean COVID-19 tests for passengers arriving from China, reflecting global concern that new variants could emerge in the ongoing outbreak.

China has been accused of a lack of transparency since the virus emerged in late 2019. The worry is that China may not be sharing data about any evolving strains that could spark fresh outbreaks in other countries.

Along with the United States, Japan, India, South Korea, Taiwan and Italy have announced passengers from China would need to test negative for COVID. An internal meeting of China’s National Health Commission estimated that up to 248 million people contracted the coronavirus over the first 20 days of December. COVID-19 is roaring through cities in China after its government recently chose to ease its strict anti-virus controls.

China’s leaders reconsidered their zero-tolerance policy for COVID cases that had been in effect the last three years. Large protests in many of China’s cities in November 2022 may have convinced the nation’s leaders to modify the policy of strictly locking down communities where COVID outbreaks occurred.

China’s economy may gain a short-term boost from relaxing its COVID-19-related lockdowns, but a spike in cases and deaths could cause shutdowns to be ordered again by government leaders. Lockdowns cut the supply of goods and prevent many people from working, shopping and obtaining food and water without assistance. A real estate slump also may ensue.

U.S. COVID Cases Exceed 100.8 Million

COVID-19 cases in the United States totaled 100,843,810, while deaths reached 1,093,028, as of Jan. 3, according to Johns Hopkins University. Until recent news that estimated China had 248 million cases of COVID-19, America had the dreaded distinction as the nation with the most coronavirus cases and deaths. Worldwide COVID-19 deaths soared to 6,693,965 people, with total cases of 661,642,654, Johns Hopkins announced on Jan. 3.

The U.S. Centers for Disease Control and Prevention reported that 268,546,218 people, or 80.9% the U.S. population, have received at least one dose of a COVID-19 vaccine, as of Jan. 4. People who have completed the primary COVID-19 doses totaled 229,254,623 of the U.S. population, or 69.1%, according to the CDC. The United States also has given a bivalent COVID-19 booster to 45,673,736 people who are age 18 and up, equaling 17.7% as of Jan. 4, 17.3% as of Dec.28, rising from 16.8% the previous week, up from 16.3% the week before than one and and jumping from 15.5% the preceding one.

Ukraine’s President Volodymyr Zelensky’s secret Dec. 21 flight to Washington, D.C., let him to talk face-to-face with U.S. President Joe Biden. Zelensky also addressed a joint session of Congress that evening. His surprise visit marked his first international trip since Russia’s invasion and required Zelensky to travel by train to Poland, where he boarded a U.S. military aircraft to fly to America. Zelensky took the trip to rally support for additional funding for Ukraine’s defense from Russia’s unrelenting aggression.

Russia sent 16 so-called “kamikaze” drones into Ukraine under the cover of darkness early Friday morning, Dec. 30, a day after firing dozens of missiles at civilian targets, power plants and other critical infrastructure. The attacks left roughly 10 million people there in darkness without heat or electricity amid frigid winter weather.

At least 76 missiles also were launched by Russia at major Ukrainian cities, including Kyiv, Odesa, Poltava, Zhytomyr, Kharkiv and Sumy, on Friday, Dec. 16, according to the Ukrainian Air Force. Russia is continuing its onslaught of intensified strikes that began in October, targeting Ukraine’s energy and civilian infrastructure.

The five dividend-paying defense investments fueled by Russia’s war against Ukraine include companies supplying the United States and its allies with military equipment that is proving effective in countering Russia’s persistent attacks. Russia leaders, showing no sign of withdrawing to its pre-2014 borders with Ukraine, seems intent on waging a long-term war that should continue to lift the five dividend-paying defense investments that seek to safeguard freedom.