Defense! General Dynamics and Lockheed

06/22/2020 5:00 am EST


Ben Reynolds

CEO, Sure Dividend

Ben Reynolds is a leading specialist on income investing. Here, the editor of Sure Dividend reviews two recommendations in the military and defense sector.

General Dynamics (GD) is an aerospace and defense company; its competitive advantage is its highly entrenched position as a well-respected defense contractor. The company has size and scale, as well as proprietary products that allow it to charge a premium to governments around the world. 

We see growth coming in at 6% annually for the foreseeable future, driven by a few different factors. Defense spending in the U.S. remains robust, and governments allied with the U.S. around the world continue to use General Dynamics’ products and services. 

The commercial jet business is suffering during the COVID-19 shutdown, but the company’s Gulfstream brand has a very successful history and we expect this slowdown to be temporary. The company’s revenue growth, margin expansion, and reduced float from share repurchases should lead to a 6% growth annually over time. 

General Dynamics trades for 14 times our earnings-per-share estimate of $11.28 for this year, which is equivalent to our estimate of fair value at 14 times earnings. 

Earnings should hold up well during the COVID-19 crisis, so General Dynamics looks fairly priced. In addition, the stock has a 2.8% yield. Along with expected growth of 6% per year, General Dynamics offers up to 8.8% prospective total annualized returns through 2025. 

Lockheed Martin (LMT) is the world’s largest defense company. The company produces aircraft like the F-35, F-22, F-16 and C-130; combat ships, naval electronics and helicopters; and missile defense, space systems, and satellites. 

Its competitive advantage comes from its deep technical expertise and its entrenched relationship with sovereign customers such as the U.S. Department of Defense. As a result, it attracts more business than it can fulfill at any one time; in fact, Lockheed Martin’s sales backlog continues to remain healthy at about $144 billion. 

Lockheed Martin is also very recession-resistant. During the global financial crisis of 2007 through 2009, the company’s earnings-per-share declined from $7.86 to $7.23 — a decrease of just 8.0%. We expect the company to fare similarly well during future economic downturns. 

Lockheed Martin’s robust industrial backlog makes its future growth prospects compelling. We expect the company to grow its earnings by 10% per year moving forward. 

The company is trading at a price-to-earnings ratio of 17.3 and our fair value estimate is an earnings multiple of 16. Still, the company’s expected returns are about 10.9% per year, making it attractive relative to the broader large-cap universe. 

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