Updated on September 28th, 2023 by Bob Ciura
Investing in defense stocks has been a big win for shareholders. As of this writing, the iShares Dow Jones U.S. Aerospace & Defense ETF (ITA) generated annualized returns of approximately 10% per year over the past 10 years.
With this in mind, we created a downloadable spreadsheet that focuses on defense stocks.
The list was derived from two major defense industry-focused exchange traded funds, ITA and the SPDR S&P Aerospace & Defense ETF (XAR).
You can download an Excel spreadsheet of all defense stocks (with metrics that matter such as dividend yields and price-to-earnings ratios) by clicking the link below:
Is there more room for these stocks to run going forward?
This article will look at the top 6 defense stocks according to the Sure Analysis Research Database.
We rank these 6 defense stocks by our expected 5-year expected returns, which includes a combination of current dividend yield, expected annual EPS growth, and any change in the valuation multiple.
Table of Contents
- Defense Stock #6: General Dynamics (GD)
- Defense Stock #5: Northrop Grumman (NOC)
- Defense Stock #4: Huntington Ingalls Industries Inc. (HII)
- Defense Stock #3: Lockheed Martin (LMT)
- Defense Stock #2: Raytheon Technologies (RTX)
- Defense Stock #1: L3Harris Technologies (LHX)
Defense Stock #6: General Dynamics (GD)
- Estimated Annual Returns: 5.2%
General Dynamics has increased its dividend for 30 years in a row. As a result, it is on the exclusive Dividend Aristocrats list.
General Dynamics operates four business divisions. Aerospace produces the high-end Gulf Stream private jet. Combat Systems makes combat vehicles like the Abrams battle tank. The company’s Aerospace segment is focused on business jets and services while the remainder of the company is defense.
Source: Investor Presentation
General Dynamics reported second-quarter results in which revenue increased 10.5% and earnings per share decreased 1.8% on lower margins. Aerospace revenue grew 4.6% on higher deliveries. Gulfstream demand has accelerated with a book-to-bill ratio of 1.3X.
Revenue for Marine Systems increased 15% while Combat Systems revenue climbed 15.5%. The company-wide backlog is at $91.4 billion of which ~$73.4 billion is funded. The book-tobill ratio was 1.2x.
Defense Stock #5: Northrop Grumman (NOC)
- Estimated Total Returns: 5.8%
Northrop Grumman Corporation is one of the five largest US aerospace and defense contractors based on revenue. Northrop Grumman makes the B-2 Spirit, E-2D, E-8C, RQ-4 Global Hawk, MQ-4C Triton, and MQ-8B/C Fire Scout.
The company reports four business segments.
Source: Investor Presentation
In the 2023 second quarter, revenue increased 9% and diluted adjusted earnings per share fell 12%. Revenue for Aeronautics Systems rose 2% due to higher volumes in Manned Aircraft and Autonomous Systems. Revenue for Defense Systems rose 10% due to higher sales in ammunition programs, the IBCS, HACM, and NATO AGS ISS.
The company ended the quarter with a backlog of $78.8 billion. The firm won $10.9 billion for restricted programs including $5.4B for restricted programs. The book-to-bill ratio was 1.14x.
Defense Stock #4: Huntington Ingalls Industries Inc. (HII)
- Estimated Annual Returns: 7.0%
Huntington Ingalls Industries was spun out from Northrop Grumman in 2011. It now primarily builds nuclear and non-nuclear ships for the U.S. Navy. The company reports three business segments: Newport News Shipbuilding, Ingalls Shipbuilding, and Mission Technologies. Newport News builds nuclear powered aircraft carriers and submarines.
You can see a review of the company’s second-quarter performance in the below image:
Source: Investor Presentation
In the 2023 second quarter, revenue rose 4.7% while diluted earnings per share fell (-26.4%) to $3.27 year-over-year. The decline in EPS was a result of higher costs, as operating margins contracted 158 basis points year-over-year. Huntington Ingalls’ total backlog now stands at $46.9 billion after about $2.6 billion in contract wins.
Defense Stock #3: Lockheed Martin (LMT)
- Estimated Annual Returns: 9.8%
With 21 years of dividend increases, Lockheed Martin is a blue chip stock.
Lockheed Martin Corporation is the world’s largest defense company. About 60% of the company’s revenues comes from the US Department of Defense, with other US government agencies (10%) and international clients (30%) making up the remainder.
The company consists of four business segments: Aeronautics (~40% sales) – which produces military aircraft like the F-35, F-22, F-16 and C-130; Rotary and Mission Systems (~26% sales) – which houses combat ships, naval electronics, and helicopters; Missiles and Fire Control (~16% sales) – which creates missile defense systems; and Space Systems (~17% sales) – which produces satellites.
Lockheed Martin reported second-quarter results in which net sales increased 8% and adjusted EPS increased 6.5%.
Defense Stock #2: Raytheon Technologies (RTX)
- Estimated Annual Returns: 11.7%
Raytheon Technologies is the result of the 2020 merger of Raytheon and United Technologies, after UTX spun off its Carrier and Otis segments. Raytheon Technologies now trades with a market cap slightly above $100 billion. It is one of the largest aerospace and defense companies in the world with $73 billion in annual revenue.
The company has four segments: Collins Aerospace Systems, Pratt & Whitney, Raytheon Intelligence & Space and Raytheon Missiles & Defense.
Source: Investor Presentation
In April 2023, Raytheon Technologies increased its quarterly dividend 7.3% to $0.59. In the 2023 second quarter, revenue increased 12% year-over-year to $18.3 billion. Adjusted earnings-per-share came to $1.29, up 11% from the same quarter last year. Both figures beat analyst estimates. Organic sales increased 13% for the quarter.
Raytheon Technologies ended the quarter with a record backlog of $185 billion. The company’s book-to-bill ratio was 1.17x for the period.
Raytheon Technologies updated its guidance for 2023, with the company now expecting sales of $73 billion to $74 billion, up from $72.0 billion to $73.0 billion, previously. Adjusted earnings-per-share are now projected in a range of
$4.95 to $5.05.
Defense Stock #1: L3Harris Technologies (LHX)
- Estimated Annual Returns: 12.8%
L3Harris Technologies was formed after the merger of L3 Technologies and Harris Corporation in 2019. The company now has three business segments: Integrated Mission Systems (~42% of revenue), Communication Systems (~23% of revenue), and Space and Airborne Systems (~35% of revenue). The majority of L3Harris’ sales are to the US Government or to other defense contractors. L3Harris generates annual revenue of approximately $17 billion.
In the 2023 first quarter, revenue increased 12% year-over-year due to organic growth and the acquisition of Tactical Data Links. By segment, Integrated Mission Systems revenue increased 8% due to higher commercial aviation sales. Space & Airborne Systems revenue increased 9% due to growth from Space, Intel & Cyber, Mission Avionics, and Mission Networks. Adjusted earnings-per-share declined 8% due to higher pension and interest expense.
The company ended the quarter with a funded book-to-bill ratio of 1.18x. The company won $5.6 billion in awards and the total backlog is about $25 billion. Future growth will also be fueled by the $4.7 billion acquisition of Aerojet Rocketdyne, which recently received FTC approval.
L3Harris maintained guidance for revenue of at least $18 billion and earnings-per-share in a range of $12.15 to $12.55 for 2023.
Final Thoughts
Defense stocks have been among the hottest stocks in the market in the past decade. This has caused many stocks in this sector to reach valuations well above their historical average.
Of the 6 defense stocks on the list, none currently meet the requirement for a buy rating, due to their expected returns being below our buy threshold of 10%.
While defense stocks could continue to perform well, we encourage investors to wait for a pullback in several of these defense stocks due to valuation concerns.
Additional Reading
The following databases of stocks contain stocks with very long dividend or corporate histories, ripe for selection for dividend growth investors.
- The High Yield Dividend Aristocrats List is comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers List is comprised of ~400 stocks with 10+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.