Six Dividend-paying Aerospace Investments to Purchase in Wartime

Six dividend-paying aerospace investments to purchase in wartime offer opportunities to obtain shares of companies aimed at enhancing national defense.

The six dividend-paying aerospace investments to purchase provide potent products to help protect freedom amid Russia’s barrage of attacks on Ukraine that started February 2022, as well as Israel’s military response to an attack by Hamas militants who murdered, raped and kidnapped civilians in Israel on Oct. 7. Even though the S&P 500 recently reached all-time highs, these six aerospace investments not only largely have stayed reasonably priced but have been recommended by industry analysts and a pension fund chairman.

State television broadcasts in Russia show the country’s soldiers advancing further into Ukrainian territory, but family members of those serving in perilous conditions due to the invasion of their neighboring nation have participated in protests to ask for their loved ones to be returned home. Despite hundreds of thousands of Russians fleeing to other countries to avoid compulsory military service, the country’s President Vladimir Putin continues sending wave after wave of soldiers into frontline combat.

While Russia’s land-grab of Crimea and other parts of Ukraine shows no end in sight, Israel’s war with Hamas likely will last at least months, according to the latest reports. United Nations’ leaders expressed alarm on Dec. 26 about intensifying Israeli attacks that killed more than 100 Palestinians over two days in part of the Gaza Strip, when 15 members of the Israel Defense Force (IDF) also lost their lives.

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Six Dividend-paying Aerospace Investments to Purchase in Wartime: General Dynamics

One of the six aerospace investments to buy in wartime is General Dynamics (NYSE: GD), a Reston, Virginia-based company with more than 100,000 employees in 70-plus countries. A key business unit of General Dynamics is Gulfstream Aerospace Corporation, a manufacturer of business aircraft. Other segments of General Dynamics focus on heavy mobile military equipment such as Abrams tanks, Stryker fighting vehicles, ASCOD fighting vehicles like the Spanish PIZARRO and British AJAX, LAV-25 Light Armored Vehicles and Flyer-60 lightweight tactical vehicles.

For the U.S. Navy and other allied armed forces, General Dynamics builds Virginia-class attack submarines, Columbia-class ballistic missile submarines, Arleigh Burke-class guided missile destroyers, Expeditionary Sea Base ships, fleet logistics ships, commercial cargo ships, aircraft and naval gun systems, Hydra-70 rockets, military radios and command and control systems. In addition, the company provides radio and optical telescopes, secure mobile phones, PIRANHA and PANDUR- wheeled armored vehicles and mobile bridge systems.

Chicago-based investment firm William Blair & Co. is among those recommending General Dynamics. The Chicago firm affirmed an “outperform” rating on General Dynamics in a Dec. 21 research note.

Gulfstream continues to work toward G700 FAA certification by the end of 2023, suggesting potentially positive news in roughly the next 10 days, William Blair wrote in its recent research note. The investment firm projected that General Dynamics would trade higher upon receipt of the certification.

“General Dynamics’ 2023 aircraft delivery guidance of approximately 134 planes assumes that 19 G700s are delivered in the fourth quarter,” wrote William Blair’s aerospace and defense analyst Louie DiPalma. “Even if deliveries fall short of this target, we believe investors will take a glass-half-full approach upon receipt of the certification.”

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Six Dividend-paying Aerospace Investments to Purchase in Wartime: GD Forecast

The G700 is a major focus area for investors because it is Gulfstream’s most significant aircraft introduction since the iconic G650 in 2012, DiPalma wrote. Gulfstream has the highest market share in the long-range jet segment of the private aircraft market, the biggest profit margin of aircraft peers and the most premium business aviation brand, he added.

“The aircraft remains immensely popular today with corporations and high-net-worth individuals,” Di Palma wrote. “Elon Musk has reportedly placed an order for a G700 to go along with his existing G650. Qatar Airways announced at the Paris Air Show that 10 G700 aircraft will become part of its fleet.”

G700 deliveries and subsequent G800 deliveries are expected to be the cornerstone of Gulfstream’s growth and margin expansion for the next decade, DiPalma wrote. This should lead to a rebound in the stock price as the profit margins for the G700 and G800 are “very attractive,” he added.

Management’s guidance is for the aerospace operating margin to increase from about 13.2% in 2022 to roughly 14.0% in 2023 and 15.8% in 2024. Longer term, a high-teens margin appears within reach DiPalma forecast.

In other General Dynamics business segments, Willian Blair expects several yet-unannounced large contract awards for General Dynamics IT, to go along with C$1.7 billion, or US$1.29 billion, in General Dynamics Mission Systems contracts that were announced on Dec. 20 for the Canadian Army. General Dynamics shares are poised to have a strong 2024, William Blair wrote.

Six Dividend-paying Aerospace Investments to Purchase in Wartime: VSEC

A competitor’s recent $725 million acquisition validates the valuation multiple of Alexandria, Virginia-based VSE Corporation (NASDAQ: VSEC), DiPalma wrote in a recent research note. AAR Corp (NYSE: AIR), a Wood Dale, Illinois, provider of aviation services, announced an agreement on Dec. 21 to acquire the product support business of Triumph Group (NYSE: TGI), a Berwyn, Pennsylvania a supplier of aerospace services, structures and systems.

VSE, a provider of aftermarket distribution and repair services for land, sea and air transportation assets of government and commercial markets, is rated “outperform” by William Blair. The company’s core services include maintenance, repair and operations (MRO), parts distribution, supply chain management and logistics, engineering support, as well as consulting and training for global commercial, federal, military and defense customers.

“Robust consumer travel demand and aging aircraft fleets have driven elevated maintenance visits,” William Blair’s DiPalma wrote in a Dec. 21 research note. “The AAR–Triumph deal is valued at a premium 13-times 2024 EBITDA multiple, which was in line with the valuation multiple that HEICO (NYSE: HEI) paid for Wencor over the summer.”

VSE currently trades at a discounted 9.5 times consensus 2024 earnings before interest, taxes, depreciation and amortization (EBITDA) estimate and 11.6 times consensus 2023 EBITDA.

Six Dividend-paying Aerospace Investments to Purchase in Wartime: Undervalued?

“We expect that VSE shares will trend higher as investors process this deal,” DiPalma wrote. “VSE shares trade at 9.5 times consensus 2024 adjusted EBITDA, compared with peers and M&A comps in the 10-to-14-times range. We think that VSE’s multiple will expand as it closes the divestiture of its federal and defense business and makes strategic acquisitions. We see consistent 15% annual upside for shares as VSE continues to take share in the $110 billion aviation aftermarket industry.”

William Blair reaffirmed its “outperform” rating on VSE on Dec. 21. The main risk to VSE shares is lumpiness associated with its aviation services margins, Di Palma wrote. However, he raised 2024 estimates to further reflect commentary from the analysts’ day VSE held in November.

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Six Dividend-paying Aerospace Investments to Purchase in Wartime: HEICO

HEICO Corporation (NYSEL: HEI), is a Hollywood, Florida-based technology-driven aerospace, industrial, defense and electronics company that also is ranked as an “outperform” investment by William Blair’s DiPalma. The aerospace aftermarket parts provider recently reported fourth-quarter financials above consensus analysts’ estimates driven by 20% organic growth HEICO’s flight support group.

HEICO’s management indicated that the performance of recently acquired Wencor is exceeding expectations. However, HEICO provided color for 2024 organic growth and margin expectations that assume reduced gains. Even though consensus estimates already forecast slowing growth, it is not a positive for HEICO, DiPalma wrote.

William Blair forecasts 15% annual upside to HEICO’s shares, based on EBITDA growth. HEICO’s management cited a host of reasons for its quarterly outperformance, highlighted by the continued commercial air travel recovery. The company also referenced new product introductions and efficiency initiatives.

HEICO’s defense product sales increased by 26% sequentially, marking the third consecutive sequential increase in defense product revenue. The company’s leaders conveyed that defense in general is moving in the right direction to enhance financial performance.

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Six Dividend-paying Defense and Aerospace Investments to Purchase: XAR

A fourth way to obtain dividends from defense and aerospace investments is through SPDR S&P Aerospace and Defense ETF (XAR). That exchange-traded fund tracks the S&P Aerospace & Defense Select Industry Index. The fund is overweight in industrials and underweight in technology and consumer cyclicals, said Bob Carlson, a pension fund chairman who heads the Retirement Watch investment newsletter.

Bob Carlson, who heads Retirement Watch, answers questions from Paul Dykewicz.

XAR has 34 securities, and 44.2% of the fund is in the 10 largest positions. The fund is up 23.79% in the last year, 21.12% in the past three months and 6.21% for the last month. Its dividend yield recently measured 1.0%.

The largest positions in the fund recently were Axon Enterprise (NASDAQ: AXON), Boeing (NYSE: BA), L3Harris Technologies (NYSE: LHX), Spirit Aerosystems (NYSE: SPR) and Virgin Galactic (NYSE: SPCE).

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Six Dividend-paying Aerospace Investments to Purchase in Wartime: PPA

The second fund recommended by Carlson is Invesco Aerospace & Defense ETF (PPA), which tracks the SPADE Defense Index. It has the same underweighting and overweighting as XAR, he said.

PPA recently held 52 securities and 53.2% of the fund was in its 10 largest positions. With so many holdings, the fund offers reduced risk compared to buying individual stocks. The biggest positions in the fund recently were Boeing (NYSE: BA), RTX Corp. (NYSE: RTX), Lockheed Martin (NYSE: LMT), Northrop Grumman (NYSE: NOC) and General Electric (NYSE:GE).

The fund is up 18.41% for the past year, 15.83% in the last three months and 5.09% during the past month. PPA’s dividend yield recently touched 0.7%.

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Six Dividend-paying Aerospace Investments to Purchase in Wartime: Observers

A third fund that Carlson suggested is iShares US Aerospace & Defense (ITA). The fund has the lowest fees among the three but has trailed the share price gains of the other two, Carlson observed.

ITA seeks to track the Dow Jones U.S. Select Aerospace and Defense Index. Like the other two funds, this one is overweight toward industrials, while underweight toward technology and consumer cyclicals, Carlson said.

The fund recently owned 36 securities, and 70.5% of the ETF was in its 10 largest positions.

Top positions in the fund recently were Boeing, RTX, Lockheed Martin, Axon Enterprise (NASDAQ: AXON) and L3Harris Technologies (NYSE: LHX).

ITA is up 14.34% during the last 12 months, 19.88% for the last three months and 5.99% in the last month. Its dividend yield is 1.4%.

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Military Product Demand Soars Amid Wars

The U.S. military faces an acute need to adopt innovation, to expedite implementation of technological gains, to tap into the talents of people in various industries and to step-up collaboration with private industry and international partners to enhance effectiveness, U.S. Joint Chiefs of Staff Gen. Charles Q. Brown Jr. told attendees on Nov 16 at a national security conference. Prime examples of the need are shown by multiple raging wars, including those in Ukraine and the Middle East, as well as a cold one involving China and its increasingly strained relationships with Taiwan and other Asian nations.

The shocking Oct. 7 attack by Hamas on Israel touched off the ongoing war in the Middle East, coupled with Russia’s February 2022 invasion and continuing assault of neighboring Ukraine. Those brutal military conflicts show the fragility of peace when determined aggressors are willing to use any means necessary to achieve their goals. To fend off such attacks, rapid and effective response is required.

“The Department of Defense is doing more than ever before to deter, defend, and, if necessary, defeat aggression,” Gen. Brown said at the national security conference held at Johns Hopkins University.

Russia’s 360-foot-long Novocherkassk war ship was damaged on Dec. 26 by a Ukrainian attack on a Black Sea port in Crimea. This video shows the ship exploding at the port when struck by aircraft-guided missiles.

Chairman Joint Chiefs of Staff Gen. Charles Q. Brown, Jr.
Photo By: Benjamin Applebaum

National security threats can require immediate action, Gen. Brown said he quickly learned since taking his post on Oct. 1.

“We may not have much warning when the next fight begins,” Gen. Brown said. “We need to be ready.”

In a pre-recorded speech, Michael R. Bloomberg, founder of Bloomberg LP, told the John Hopkins attendees of a critical need for collaboration between government and industry.

“Building enduring technological advances for the U.S. military will help our service members and allies defend freedom across the globe,” Bloomberg remarked before the National Security Innovation Forum at the Johns Hopkins University Bloomberg Center.

Michael Bloomberg, philanthropist and founder of Bloomberg L.P.

The “horrific terrorist attacks” against Israel and civilians living there on Oct. 7 underscore the importance of that mission, Bloomberg added.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, Guru Focus and other publications and websites. Attention Holiday Gift Buyers! Consider purchasing Paul’s inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The uplifting book is great gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others. Call 202-677-4457 for special pricing on multiple-book purchases or autographed copies! Follow Paul on Twitter @PaulDykewicz. He is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper, after writing for the Baltimore Business Journal and Crain Communications.