Dividend-paying Defense Investments Serve the U.S. Navy and Shareholders
By: Paul Dykewicz,
Dividend-paying defense investments serve the U.S. Navy and reward shareholders for their patience as they team up for what could be the largest procurement cycle since the Reagan administration in the 1980s.
The dividend-paying defense investments’ strong returns in 2022 gained a boost on Dec. 29 when President Biden signed a $1.7 trillion federal spending bill that gave the U.S. Department of Defense (DoD) $797.7 billion in discretionary funds for fiscal year 2023, up $69.3 billion, or 9.5%, compared to fiscal year 2022. The amount appropriated for the national defense topped the president’s budget request by $36.1 billion.
The spending is aimed at developing, maintaining and equipping the U.S. military and intelligence community. The legislation also expanded weapons procurement by $5.9 billion, a $1.1 billion increase from President Biden’s request, to allow the Navy to obtain 2,365 munitions as Russia’s war against Ukraine rages. At the same time, China is increasing its threatening military flyovers and other provocations against Taiwan and elsewhere in the Asia-Pacific region.
Bipartisan support for increased U.S. defense spending resembles what occurred during President Reagan’s pro-military administration that began with his inauguration on January 20, 1981, then ended at the conclusion of his second term on January 20, 1989.
Dividend-paying Defense Investments Powered Partly by Navy Spending Surge
The dividend-paying defense investments to serve the U.S. Navy outperformed the market in 2022 by rising when the major indices were falling. The momentum appears to be advancing for 2023 on the heels of President Biden signing legislation to enhance U.S. warfighting capabilities.
The omnibus budget bill signed by the president provided $31.96 billion, or $4 billion more than requested by the president, to procure 11 Navy ships. Other appropriations included three DDG-51 guided missile destroyers, two SSN-774 attack submarines, one Frigate, one T-AO Fleet Oiler, two expeditionary fast transports, one towing, salvage and rescue ship and one LPD Flight II amphibious transport dock.
Lives Depend on Dividend-paying Defense Investments
The importance of providing the right equipment for a given military mission cannot be overstated. Lives depend on it.
As a boy growing up, I learned that one of my neighbors, George Bland, had served in the U.S. Navy and participated in the famed Normandy beach amphibious landing on D-Day during World War II. After nearly drowning with his heavy backpack weighing him down as he struggled mightily to reach the shore, Bland became one of the survivors who helped to liberate France to preserve freedom in America, in Europe and much of the world.
Bland is among a “band of brothers” from America’s “Greatest Generation” who are remembered and honored again as their earthly lives come to an end. Even though he died on Dec. 31 at age 98, I remember him as a kindly, smiling neighbor, a devoted dad to his three darling daughters and a respected educator who made a positive difference upon returning home.
The following is an excerpt of a memorial poem I wrote for his family.
World War II required Americans to take a stand.
One of the best to serve was Navy’s George Bland.
When the key Normandy beach landing took place,
this hero helped to liberate France with God’s grace.
Dividend-paying Defense Investments Reward Shareholders
My late father, our dearly departed next door neighbor, Elliot Price, and many others I know also have served honorably in the Navy. The missions of today require advanced technology, sophisticated cybersecurity and other capabilities that only could have been dreamed about on D-Day, June 6, 1944.
Those modern military tools require hefty research and development (R&D) spending. However, many defense stocks not only support the Navy’s missions but also pay dividends to their shareholders.
BWX Technologies Is One of the Dividend-paying Defense Investments Serving the U.S. Navy
BWX Technologies, Inc. (NYSE: BWXT), a Lynchburg, Virginia-based supplier of nuclear components and fuel to the U.S. government, offers precision manufacturing for the U.S. Navy’s submarines and aircraft carriers. The latter opportunity could be big for BWX, as the U.S. Navy rebuilds its aging fleet and procures submarines and aircraft carriers.
After years of underinvestment, the United States may be in the early stages of the “strongest U.S. Navy procurement cycle” since Reagan’s presidency, according to BofA Global Research. BWT Technologies provides technical, management and site services to support the operation of complex facilities, environmental restoration activities, precision parts, services and fuel. The company also maintains a highly skilled security force to safeguard its facilities where complex operations are performed.
The U.S. Navy currently has 296 deployable ships, as compared to the goal of 355 ships that it set in 2016. Since 2019, the Navy has been working on creating a new goal of anywhere between 321 and 404 manned ships and 24-45 large, unmanned vehicles (UVs).
“A congressionally mandated Battle Force Ship Assessment and Requirement (BFSAR) report delivered to Congress in July of 2022 reportedly calls for 373 battle force ships, but the details surrounding the report are currently classified,” according to a recent BofA research report.
BofA Gives $66 Price Target to BWX Technologies
BWX Technologies received a $66 price target from BofA, implying a 1.1x relative multiple on defense prime contractors. The premium is supported by the company’s exposure to the U.S. Navy, its monopoly on nuclear-powered ships and its diversification efforts.
Potential risks include future cuts to the DoD budget, changes in contracting terms that could hurt profit margins and possible market share loss. The U.S. government is BWX’s largest customer and accounts for about 90% of the company’s revenues, according to BofA.
Outperformance could occur if BWX achieves better-than-forecast operating results and margins, demand increases for nuclear aftermarket at power plants and the need for missile tubes on the Virginia-class and Ohio-class submarines rises. Acquisitions also may provide further upside, BofA wrote in a research note.
Chart courtesy of www.stockcharts.com
Leidos Leaps Among Dividend-paying Defense Investments
Another of the defense stocks ripe for investment is Leidos Holdings (NYSE: LDOS), based in Reston, Virginia. Previously known as Science Applications International Corporation, the company serves the U.S. defense, aviation, information technology and biomedical research, providing scientific, engineering, systems integration and technical services industries.
BofA set a price target of $130 on Leidos, forecasting that the company should trade in line with the defense prime contractors amid strong U.S. national security demand for innovative technologies and solutions. The company also has solid free cash flow, countered by a lumpy contract award environment, near-term supply chain pressures and mounting concerns about labor inflation.
Risks to reach the price target include cuts to the U.S. government budget compared to expectations, increased competition from non-traditional competitors and problems integrating M&A, hiring the right personnel, containing costs, estimating costs and executing on fixed price contracts. The company also could incur reputational risk.
Potential outperformance could come from a better-than-expected federal budget allocated to innovative technologies and modernization, inexpensive and well-integrated M&A activity, along with unexpected capital return to shareholders through dividends or share buybacks, market share gains, or better-than-forecast margin expansion, BofA wrote.
Chart courtesy of www.stockcharts.com
Michelle Connell, who heads Dallas-based Portia Capital Management, described Leidos as a strong mid-cap defense stock that is not covered as prominently as the large-cap stocks in the industry. The company has a large domestic customer base that produces 90% of its revenues.
Leidos serves the DoD, U.S. intelligence agencies, Department of Homeland Security and the Department of Veteran Affairs. With foreign government revenues currently accounting for less than 10% of the company’s total sales, that segment of the business could present “a great opportunity,” Connell counseled. The United Kingdom, Germany and other NATO allies are eyeing improvement in their military intelligence and cyber security efforts.
Strong, consistent cash-flow generation during the last 10 years has reached at least $500 billion, Connell continued. She gave the stock potential upside of 15%.
Michelle Connell leads Dallas-based Portia Capital Management.
U.S. Military Veteran Seeks out Dividend-paying Defense Investments
Jim Woods, a seasoned stock picker and the leader of the Bullseye Stock Trader advisory service, recommends stocks and options that include defense investments. Woods, who concurrently heads the Intelligence Report investment newsletter, is a former Army paratrooper who has strategically invested in defense stocks profitably. In fact, he recently recommended the stock and options in a traditional defense investment.
Paul Dykewicz talks with Jim Woods, head of Bullseye Stock Trader.
Woods also teams up with Mark Skousen, the head of the Forecasts & Strategies investment newsletter and a leader of the Fast Money Alert trading service that invests in stocks and options. Skousen queried SpaceX and Tesla (NASDAQ: TSLA) founder Elon Musk at the annual Baron Investment Conference held in New York on Nov. 4. Skousen, who also is a Chapman University Presidential Fellow and recently was named the first Doti-Spogli Chair in Free Enterprise at its Argyros School of Business and Economics, recommended Tesla with Woods in Fast Money Alert earlier this week due to the stock’s reduced valuation, after plunging 66.3% in the last year.
Mark Skousen, a scion of Ben Franklin and chief of Fast Money Alert, meets Paul Dykewicz.
Skousen and Woods, co-leaders of the Fast Money Alert trading service, combined to produce a short-term gain of nearly 10% with their Oct. 3 recommendation of defense, space and cyber consulting firm Booz Allen Hamilton (NYSE: BAH), of McLean, Virginia. The call options they recommended soared 239.27% in just 28 days, then they advised taking the profit.
Three Funds Find Places Among Dividend-paying Defense Investments
Investors who are looking for a diversified portfolio of defense and aerospace stocks have three exchange-traded funds (ETFs) to choose from: Invesco Aerospace & Defense (PPA), iShares U.S. Aerospace & Defense (ITA) and SPDR S&P Aerospace & Defense (XAR). However, the returns between the ETFs have varied considerably in recent years because they track different indexes and can have very varied holdings, said Bob Carlson, a pension fund chairman who also heads the Retirement Watch investment newsletter.
PPA follows the SPADE Defense Index. The fund recently held 56 stocks, and its top holdings were Boeing (NYSE: BA), Raytheon (NYSE: RTX), Lockheed Martin (NYSE: LMT), Northrop Grumman (NYSE: NOC) and General Dynamics (NYSE: GD). Its 10 largest positions were 56% of the ETF.
Chart courtesy of www.stockcharts.com
ITA follows the Dow Jones U.S. Select Aerospace & Defense Index. Its top holdings recently were Raytheon, Lockheed Martin, Boeing, TransDigm (NYSE: TDG) and Northrop Grumman. It held 35 stocks, and the top 10 holdings of the ETF comprised 75% of the portfolio.
Chart courtesy of www.stockcharts.com
XAR follows the S&P Aerospace & Defense Select Industry Index. It recently held 33 stocks, and 41% of the fund was in the 10 largest positions.
Top holdings featured Maxar Technologies (NYSE: MAXR), Spirit Aerosystems (NYSE: SPR), Boeing, Woodward Inc. (NASDAQ: WWD) and Aerojet Rocketdyne Holdings (NYSE: AJRD). The fund is down 1.24% in the last 12 months but up 20.41% in the last three months.
Chart courtesy of www.stockcharts.com
China’s COVID Cases Jump After Easing Zero-Tolerance Policy
Satellite images of Chinese cities have shown crowding at crematoriums and funeral homes, with the world’s most populous country waging a battle with a new wave of COVID-19 infections after relaxing its strict pandemic restrictions.
The number of COVID-19 cases has reached a record high in mainland China, according to the European Centre for Disease Prevention and Control (ECDC). However, cases in China reportedly have fallen in recent weeks, but possibly due to reduced availability of tests to detect cases.
The U.S. government began requiring negative COVID-19 tests starting Thursday, Jan. 5, for all passengers seeking to enter the country from China after the latter country’s spike in COVID-19 cases. France and several other countries also mandated clean COVID-19 tests for passengers arriving from China, reflecting global concern that new variants could emerge in the ongoing outbreak.
China has been accused of lacking transparency since the virus emerged in late 2019. Critics contend China may not be sharing data about evolving strains that may spark fresh outbreaks in other countries.
Along with the United States, Japan, India, South Korea, Taiwan and Italy have announced passengers from China would need to test negative for COVID. An internal meeting of China’s National Health Commission estimated that up to 248 million people contracted the coronavirus during the first 20 days of December. COVID-19 still is roaring through cities in China.
Worldwide COVID Cases Reach 666.6 Million
Worldwide COVID-19 deaths soared to 6,721,638 people, with total cases of 666,552,986, Johns Hopkins announced on Jan. 13. COVID-19 cases in the United States totaled 101,641,427, while deaths reached 1,099,823, as of Jan. 13, according to Johns Hopkins University. Until recent news that estimated China had 248 million cases of COVID-19, America had the dreaded distinction as the nation with the most coronavirus cases and deaths.
The U.S. Centers for Disease Control and Prevention reported that 268,556,888 people, or 80.9% the U.S. population, have received at least one dose of a COVID-19 vaccine, as of Jan. 11. People who have completed the primary COVID-19 doses totaled 229,359,062 of the U.S. population, or 69.1%, according to the CDC. The United States also has given a bivalent COVID-19 booster to 45,882,482 people who are age 18 and up, equaling 18.2% as of Jan. 11, up from 17.7% as of Jan. 4, 17.3% as of Dec.28, rising from 16.8% the previous week, up from 16.3% the week before that one and and jumping from 15.5% the preceding week.
Ukraine’s President Volodymyr Zelensky’s secret Dec. 21 flight to Washington, D.C., let appeal face-to-face to U.S. President Joe Biden to successfully advocate for additional military supplies to defend against Russia’s continuing attacks. Zelensky’s address to a joint session of Congress that evening appears to have appealed to many U.S. lawmakers. The surprise visit marked Zelensky’s first international trip since Russia’s invasion.
Russia is continuing its onslaught of intensified strikes that began in October, targeting Ukraine’s energy and civilian infrastructure.
Five Dividend-paying Defense Investments Serve the U.S. Navy and the Ukraine to Defend Freedom
Most recently, Russia, whose leaders describe their attack of Ukraine that began Feb. 24 as a “special military operation,” are escalating their assault of the Ukrainian city of Bakhmut. One of Russia’s military leaders said his troops had gained control of a nearby city in eastern Ukraine called Soledar.
The dividend-paying defense investments serve the U.S. Navy and shareholders alike as Russia wages war against Ukraine. Many U.S. weapons have been sent to Ukraine to aid in its defense to help its beleaguered people fend off Russia’s attacks against them. Kremlin leaders have called up 300,000 conscripts and plans to expand the eligible age for its draft as part of an announced strategy to wage a long-term war that should continue to attract investors to dividend-paying defense investments that focus on protecting freedom around the world.
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