President Joe Biden signed the fiscal year 2022 defense budget bill in mid-March, appropriating $728.5 billion to the country’s military. Among the $32.5 billion year-over-year increase in defense spending, the budget authorizes big increases to the Army’s budget for network technology and air and missile defense.
Another $40 billion in funds to assist Ukraine in its fight against the Russian invasion is expected to be approved by the U.S. Senate Thursday before going to the president for signature. CNN has a good breakdown of how the funds will be used. About half will be used to restock U.S. inventory to replace equipment already sent to the beleaguered Ukrainians and to buy more weapons from contractors to send to Ukraine.
Judging by investors’ reaction to the budget bill and the additional funding to support Ukraine, the increase in U.S. defense spending had been priced in already. Since the Russian invasion began on February 24, aerospace and defense stocks actually have traded lower, after an initial jump that pushed the sector’s stocks up more than 10% for the year to date.
We screened defense contractors not just for their dividend yields, which are modest compared to yields from other sectors like maritime shipping or mortgage REITs. Using their payout ratio (dividends paid as a proportion of net income), we found five defense firms that payout at least 40% of their earnings in dividends.
Raytheon Technologies
Raytheon Technologies Corp. (NYSE: RTX) paid a dividend yield of 2.18% for the past 12 months. The company reported net income of $4.2 billion and paid out dividends totaling $3 billion, for a payout ratio of 71.44%. For the next 12 months, the payout ratio is forecast to increase to 2.38%. Raytheon’s total return for the past year was 11.7%.
According to a report from Defense News, 65% of Raytheon’s total revenue in 2020 of $65 billion was attributable to defense ($42 billion). That is the lowest defense percentage among the companies on our list.
Of 18 analysts covering Raytheon, 13 have a Buy or Strong Buy rating, along with an average price target of $113.60, implying a share price gain of 22.6%. The stock’s 52-week trading range is $79.00 to $106.02.
Lockheed Martin
Over the past 12 months, Lockheed Martin Corp. (NYSE: LMT) paid a dividend yield of 2.56%. The company reported net income for the period of $6.21 billion and paid out $2.97 billion in dividends, for a payout ratio of 47.79%. For the next 12 months, the dividend yield is forecast to rise to 2.63%. Lockheed’s total return for the past year was 15.47%.
In 2020, Lockheed posted total revenue of $65.4 billion, of which 96% ($62.56 billion) was attributable to defense. That is the highest percentage of defense revenue among the companies in our list.
Analysts are much cooler toward Lockheed. Just five of 16 awarded Buy or Strong Buy ratings to the stock. The rest rate the stock at Hold. At an average price target of $482.40, the implied upside on the stock is 11.1%. Lockheed’s 52-week range is $324.23 to $479.99.
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