There are specific sectors that will continue to deliver steady growth through the decade. Without a doubt, the defense sector will be on that list and it’s a good time to remain invested in some of the best defense stocks.
As an overview, global defense spending increased by 3.7% in 2022 to $2.24 trillion. Further, “global spending grew by 19 percent over the decade 2013–22 and has risen every year since 2015.” With several geopolitical friction points globally, this trend is likely to sustain.
I, therefore, expect defense companies to witness steady growth in the order book. This will translate into robust cash flows and value creation. Given this growth potential, I believe that some of the best defense stocks are trading at undervalued levels.
Let’s discuss three defense stocks to buy and hold forever for high total returns.
Lockheed Martin (LMT)
Lockheed Martin (NYSE:LMT) stock has been sideways year-to-date. I believe that it’s a good time to accumulate with the company likely to deliver strong numbers in the coming quarters. The first point is that LMT stock trades at a forward price-earnings ratio of 17.3. The stock also offers an attractive dividend yield of 2.58%.
From a business perspective, there are two points to note. First, Lockheed reported an order backlog of $145 billion for Q1 2023. I expect the backlog to swell amidst positive industry tailwinds. This provides clear revenue and cash flow visibility.
Further, Lockheed has guided to return to growth in 2024. This is a key stock upside catalyst. For the current year, the company expects free cash flow of $6.2 billion. FCF will likely increase in 2024 and beyond. The possibility of healthy dividend growth makes LMT stock attractive.
Leonardo DRS (DRS)
Leonardo DRS (NASDAQ:DRS) is an emerging name in the defense sector and can be a potential multi-bagger. DRS stock has surged by 76% in the last 12 months, but valuations are attractive.
As an overview, the company was formed after the merger of Rada Electronic and Leonardo. The company is a provider of defense products and technologies that include advance sensing, network computing, and force protection.
Currently, Leonardo has an order backlog of $4.3 billion, which provides clear revenue visibility. For the current year, the company expects revenue of $2.75 billion. Further, EBITDA margin is expected at 11.7%. I believe that margin expansion is likely in the coming years on merger synergies and operating leverage.
An important point to note is that Leonardo has high financial flexibility. The company has outlined innovation and mergers as a key growth strategy. The potential acquisition can boost the growth outlook.
Raytheon Technologies (RTX)
Coming back to blue-chip defense stocks, Raytheon Technologies (NYSE:RTX) looks attractively valued at a forward price-earnings ratio of 19.1. RTX stock also offers a dividend yield of 2.45%.
There are few reasons to be bullish on Raytheon from a business perspective. First, the company has a defense backlog of $70 billion, which provides clear cash flow visibility.
Further, Raytheon has been investing $10 billion annually in research & development and capital investments. With innovation, the company is positioned for sustained growth. Currently, the company has guided for 6% to 7% adjusted sales growth CAGR through 2025. Additionally, margin expansion will continue through 2025 on the back of factors like automation. Therefore, free cash flow visibility is strong.
It’s also worth noting that Raytheon is targeting $33 to $35 billion in capital return to shareholders through 2025. Therefore, dividend growth is likely to remain healthy along with value creation through share repurchase.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
