Global defense spending increased for the eighth consecutive year in 2022 and touched an all-time high of $2.24 trillion. Given the multiple points of geopolitical friction globally, it’s likely that defense spending will continue to increase at a healthy pace. I would therefore hold some of the best defense stocks in your portfolio for value creation.
Even during the pandemic years, global defense spending increased. This is an indicator that the industry is immune to economic shocks or any potential black swan events. Therefore, blue-chip defense stocks are interesting from the perspective of dividend income. Cash flows are predictable and ensure that dividends sustain and increase steadily.
I must add that rising geopolitical tensions have contributed to defense spending growth. However, buying defense stocks at current valuations still allow for high total returns in the long-term.
Lockheed Martin (LMT)
Lockheed Martin (NYSE:LMT) is among the best defense stocks for dividend income. LMT stock trades at an attractive forward price-to-earnings ratio of 16.3 and offers a dividend yield of 2.84%. Considering the outlook for the defense sector, I expect steady dividend growth. Further, valuations point to potential for high total returns in the next 12 to 24 months.
As of Q3 2023, Lockheed Martin reported an order backlog of $156 billion. The backlog provides the company with clear revenue and cash flow visibility. For the current year, Lockheed has guided for free cash flow of $6.2 billion.
I believe that there are two important factors that will ensure sustained growth in backlog. First, Lockheed is focused on expanding its international collaboration. Some of the recent orders have come from Norway and Philippines, among others. Orders from U.S. allies will support backlog growth and revenue acceleration.
Further, Lockheed has been investing in innovation. As an example, the Company’s X-59 experimental supersonic aircraft was selected as one of TIME’s “Top Inventions of 2023.” Investment in next generation defense technology will ensure that Lockheed is ahead of the curve.
Northrop Grumman (NOC)
Northrop Grumman (NYSE:NOC) is another attractive defense stock for dividend income. NOC stock offers a dividend yield of 1.58% and I expect sustained dividend growth considering the backlog and industry tailwinds.
The outlook for Northrop Grumman looks positive considering the backlog growth. As of Q3 2023, the company reported a record backlog of $84 billion. It’s worth noting that the order intake during the quarter was $15 billion. If this trend sustains, NOC stock will be due for re-rating because of an attractive forward P/E ratio of 20.8.
It’s worth noting that for Q3 2023, Northrop returned $500 million to investors in the form of dividend and share repurchase. For the quarter, the company reported adjusted free cash flow of $900 million. As the backlog swells, the Company has guided for “rapid free cash flow expansion over next 5 years.” This underscores my view on healthy dividend growth.
RTX Corporation (RTX)
RTX Corporation (NYSE:RTX) stock looks massively undervalued at a forward P/E ratio of just 15.8. Further, RTX stock offers a dividend yield of 2.98%. It’s therefore another name among defense stocks that’s likely to deliver high total returns in the next few years.
From a growth perspective, RTX Corporation reported an order backlog of $190 billion for Q3 2023. Of this, $75 billion backlog was from the defense sector. For Q3 2023, the company reported an order intake of $22 billion. With a strong backlog and order intake, RTX is positioned for healthy cash flows. For the current year, the Company has guided for FCF of $4.8 billion.
Another important point to note is that RTX expects to start deleveraging from 2024. This will be through internal cash flows and disposition of non-core assets. As credit metrics improve, RTX stock is likely to trend higher. Further, as interest expense declines, the company will have flexibility to increase dividends and 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.
