Five Defense Investments to Purchase for Dividends as Ukraine Fights for Freedom
By: Paul Dykewicz,
Russia’s Feb. 24 invasion of Ukraine has wielded a devastating toll that has resulted in the death of tens of thousands of people, destruction of an entire Ukrainian city in the case of Mariupol and a blockade by Russia’s President Vladimir Putin of grain shipments desperately needed in Africa and other places in the developing world where 140 million people live in famine conditions. The five defense investments to purchase for dividends feature an exchange-traded fund focused on the industry and four large-cap military contractors.
The five defense investments to purchase for dividends offer ways to support Ukraine’s attempt to fend off Russia’s unrelenting attacks and also present opportunities to pursue profits from the biggest military clash in Europe since World War II. Many Western countries have provided military equipment to Ukraine as it seeks to survive Russia’s attacks, as well as replenish supplies for ammunition and other weapons needed to stop invading troops from overrunning the much smaller and less populous country.
Russian Military Deaths Estimated by Ukraine Leaders to Top 35,750 as July Begins
Ukraine’s military estimated in a July 1 Facebook post that roughly 35,750 Russian soldiers had been killed since the start of the invasion. Ukraine’s death toll, including civilians, also is projected to be tens of thousands of people, but the exact number is difficult to document since many places have been seized by Russian soldiers, particularly along the Black Sea. Thus, a precise count of the dead still is prohibitive.
Russia has been accused of committing thousands of war crimes by its troops that were ordered to attack Ukraine, where civilian, industrial, cultural, religious and military have been heavily damaged. Despite Putin calling his attack on Ukraine a “special military operation,” leaders of the European Union, the United Nations, the United States, the United Kingdom and other countries have countered that the invasion of a sovereign country is a clear violation of international law.
Five Defense Investments to Purchase as Ukraine Seeks Freedom Shows Paradigm Shift
The war in Ukraine has ushered in a paradigm shift from using military might as a deterrent to direct clashes with Russia’s forces that are persisting. Amid multi-month fighting with heavy armaments, stockpiles of weapons and ammunition need to be resupplied.
Russia’s sustained assault on Ukraine has spurred leaders of many countries to express support for fortifying their national defenses and operational readiness. European nations, in particular, are on high alert due to the proximity of the battle in Ukraine to their own borders, amid threats from Putin and other Russian leaders that their ultimate plan is to seize land in other nearby nations.
Despite the devastation, defense companies are positioned to benefit from the increased military spending. U.S. defense spending specifically will continue to grow with strong support of inflation adjustments and additional aid packages from Congress.
Five Defense Investments to Purchase May Be Fueled by Rising Federal Spending
“The Department of Defense (DoD) has also included special provisions to major contractors to alleviate supply chain and worker constraints impacting critical programs such as the Virginia class submarine,” according to a recent research note from BofA Global Security’s defense and aerospace analyst Ron Epstein. “We anticipate defense spending levels to remain elevated and could reach about $1 trillion by 2025 or 2026.”
Defense stocks have remained somewhat “insulated” from the worst of the market’s recent retreats and outperformed on a relative basis due to their low beta compared to the risk of other investments, Epstein continued. The increase in defense modernization priorities, inflation pass-through on contracts, and few substitutes will support the defense market in outperforming the general markets, he added.
Putin’s Policies Have Potential to Propel Five Defense Investments to Purchase
Putin has caused sanctions to be placed on his country in direct response to his attack, and he is blocking the important grain exports from Ukraine, preventing food from reaching people as far away as Africa, where people are enduring famine conditions as a result. Not only is he insisting that other nations cease their restrictions on his country’s goods before he allows grain exports to resume, but his troops have shelled civilian targets in Ukraine mercilessly.
Russian troops have decimated hospitals, schools, residential areas, churches, nuclear power plants, oil refineries, a theater used as a shelter, a train transporting food for World Central Kitchen and a crowded shopping mall, amid reports his soldiers raped, tortured, kidnapped and executed Ukrainian civilians. In the latest high-profile civilian attack by Putin’s forces, a Russian missile strike hit and caused deaths a shopping center with 1,000-plus civilians on Monday, June 27, in the central Ukrainian city of Kremenchuk, an industrial city of 217,000 and home of the country’s biggest oil refinery before Russia’s Feb. 24 invasion.
At the G7 meeting in Germany on Tuesday, June 28, the United States, the United Kingdom, Canada and Japan announced that they agreed to stop importing Russia’s gold. The move aims to halt Russia’s largest non-energy revenue source that totaled $15.47 billion last year. The U.S. Treasury and State Department each announced on June 28 that they were sanctioning a combined 115 entities and 48 individuals that are “critical” to Russia’s defense industrial base.
“The United States reaffirms our commitment to working alongside our allies and partners to further impose severe consequences on President Putin and his supporters for Russia’s unprovoked and unjustified war against the government and people of Ukraine,” the State Department announced.
Five Defense Investments to Purchase Should Not Be Slowed by President Biden’s New Tariffs
President issued a proclamation this week to raise tariffs on over 570 groups of Russian products worth approximately $2.3 billion to the war-waging country. These measures are calibrated to impose costs on Russia, while minimizing costs to U.S. consumers, according to the State Department.
The actions, in coordination with those of U.S. partners, further cut off Russia’s access to critical technology for its defense sector. By targeting those enabling President Putin’s war, the intent is to further weaken Russia’s war-making capabilities. These actions further align with measures taken by Australia, Canada, the European Union, Japan, New Zealand, Switzerland and United Kingdom, according to the State Department.
Pension Fund Head Recommends One of Five Defense Investments to Purchase
Bob Carlson, a pension fund chairman who also leads the Retirement Watch investment newsletter, spoke favorably about defense industry exchange-traded fund (ETF) Invesco Aerospace and Defense (PPA). The fund is more focused on defense than aerospace and seeks to track the SPADE Defense Index, which is composed of stocks of companies that are systematically important to the industry, Carlson continued.
Bob Carlson, who leads Retirement Watch, meets with Paul Dykewicz.
About 86% of the fund is in stocks classified in the industrial sector by S&P and about 13% are in the technology sector, Carlson counseled. The fund recently held 55 stocks and 55% of the fund was in the 10 largest positions. Top holdings in the fund include major U.S. defense stocks.
Chart courtesy of www.stockcharts.com
The fund is down 2.46% in the past month, 10.11% over the last three months, 2.44% for the year to date and 5.97% over the previous 12 months. However, PPA has outperformed the market and is up 3.87% in the last week.
General Dynamics Gains Buy Rating from Intelligence Report Leader
General Dynamics (NYSE: GD), a global aerospace and defense company based in Reston, Virginia, is a recommendation of stock picker Jim Woods in his monthly Intelligence Report investment newsletter. The company produces combat vehicles, nuclear-powered submarines and communications systems to provide safety and security.
General Dynamics employs more than 100,000 people worldwide and generated $38.5 billion in revenue in 2021. Woods highlights that the company also pays a dividend that currently yields 2.3%.
Five Defense Investments to Purchase Feature General Dynamics
General Dynamics also received a “buy” recommendation from BofA, which set a price objective of $305, based partly on a 5.0% 2025-2030 growth rate and 2.8% long-term growth rate, as well as increased defense budget expectations. BofA wrote that the company’s defense program exposure to land and sea priorities, coupled with its Gulfstream business jet manufacturing segment, could provide near-term and medium-term organic growth.
Other plusses are the company’s strong balance sheet and solid cash generation to help sustain dividend growth and share repurchases, BofA wrote.
Potential downside risks to reaching that price target, according to BofA, are a possible downturn in business jet sales due to an exogenous factor and the pricing of business jets in dollars, making the company vulnerable to an unexpected devaluation of the U.S. dollar that could significantly impact orders. Any adverse impact on margins for defense programs and unforeseen government budget cuts could limit growth in the medium- and long-term.
Chart courtesy of www.stockcharts.com
L3Harris Lands Among Five Defense Investments to Purchase
L3Harris (NYSE: LHX), a Melbourne, Florida-based defense contractor and information technology services provider that produces C6ISR systems and products, wireless equipment and tactical radios, also netted a buy recommendation from BofA. The defense company, consisting of Integrated Mission Systems; Space & Airborne Systems, and Communication Systems, received a $285 price objective from BofA.
The valuation is in line with the median for a pure play defense stock, BofA wrote. However, an improved sentiment on defense spending should sustain a relative valuation slightly above the historical average, the investment firm added.
Potential reasons for the company to beat its price target include winning more business on new and existing programs versus BofA’s current expectations. Risk to the stock includes the possibility integration of past acquisitions may put a strain on the company’s cash and impact free cash flow estimates.
Chart courtesy of www.stockcharts.com
Money Manager Picks Northrop Grumman as One of Five Defense Investments to Purchase
Northrop Grumman (NYSE: NOC), a multinational aerospace and defense technology company headquartered in Falls Church, Virginia, is one of the world’s largest weapons manufacturers and military technology providers with 90,000 employees and $30 billion-plus in annual revenue. It also is a recommendation of BofA and has the potential to rise 20-25% in the next 12-18 months compared to the company’s current share price, said Michelle Connell, a former portfolio manager who heads Dallas-based Portia Capital Management.
Michelle Connell, CEO, Portia Capital Management
Increased geopolitical tensions do not look likely to end soon and defense stocks should continue to have an allocation in an investor’s portfolio, Connell counseled. Until the “exacerbated pullback” in the markets, defense stocks such as Northrop Grumman had performed very well, she added.
Reasons Five Defense Investments to Purchase Include Northrop Grumman
Northrop Grumman stands out from the defense pack, Connell said, partly due to:
-Developing the first B-21 bomber for the Air Force, after the company passed its first round of tests about the efficacy of the bomber that is expected to be released in 2023.
-Preparing next-generation ballistic missile systems under the name of Sentinel.
-Growing three-year revenue and profits strongly, even though sales were weak in the last quarter due to shortages of labor and supply chain issues that could continue into the rest of 2022.
Interested buyers of the stock may want to wade in with purchases and take a first step before July 29 to receive the next dividend payment, Connell advised.
Institutional Buying of Northrop Grumman Elevate Stock Among Five Defense Investments to Purchase
“I take some solace in knowing that before the recent pullback, the stock volume and institutional buying for NOC had increased,” Connell said.
BofA derived a $550 price objective on the stock, partially due to a 4% year over year growth rate for 2025-2030 estimates and a 2.5% long-term growth rate. In addition, the U.S. Defense Budget Authorization has grown at a 1.8% compound annual growth rate (CAGR) in constant dollars since post World War II, BofA’s Epstein wrote.
Northrop Grumman’s growth rate may exceed the industry norm with the most profitable production phase of the B-21 Raider program starting in about 10 years and the U.S. Air Force’s Ground Based Strategic Deterrent (GBSD) entering production at the end of this decade. The GBSD is the replacement weapon system for the aging LGM-30 Minuteman III intercontinental ballistic missile (ICBM) system.
Potential risks to the stock include possible defense program cost overruns and margin contractions. Further stumbles could come from unexpected cancellations to both the company’s commercial and military programs.
Chart courtesy of www.stockcharts.com
Raytheon Technologies Ranks Among Five Defense Investments to Purchase
Raytheon Technologies Corp. (NYSE: RTX), of Waltham, Massachusetts, is another buy recommendation of BofA. The multinational aerospace and defense conglomerate is one of the largest aerospace, intelligence services and defense manufacturing providers in the world by revenue and market capitalization. The stock has a $130 price objective from BofA. Those projections include the risk of a potential impact of the research and development (R&D) amortization tax change to reflect conservatism, BofA wrote.
Risks to Raytheon reaching that price target include a downturn in commercial aviation due to the natural business cycle or an exogenous event such as a terrorist attack. A severe global economic slowdown would affect top-line growth, since 45% of sales are produced outside the United States.
In addition, any execution risk on defense programs could result in cost overruns and margin contractions. Orders from international programs also are difficult to time due to the complexity of the process, BofA wrote.
“Thus, we could see some lumpiness with regard to international orders,” according to a recent BofA research note. “Unexpected cancellations to programs in both commercial and military could materially impact RTX.”
Chart courtesy of www.stockcharts.com
China’s Lockdowns Should Not Imperil Five Defense Investments to Purchase
China’s President Xi Jinping said Wednesday, June 29, that the Communist Party’s strategy of lockdowns to curb the COVID-19 pandemic was “correct and effective.” As the world’s most populous country, it would have suffered “unimaginable consequences” had it adopted a hands-off strategy, he added during a June 28 visit to the central city of Wuhan where the virus first was reported.
Meanwhile, a new COVID-19 outbreak in China is affecting the country’s technology hub of Shenzhen, spurring stepped-up testing and leading to lockdowns of certain neighborhoods. In addition, the gambling mecca of Macau, an hour away by car, is responding to an outbreak of the virus for the first time this year.
Those new cases are coupled with positive news from major metropolitan areas of Beijing and Shanghai that have used lockdowns to stem the spread of new cases. However, the U.S. ambassador to China criticized China’s “zero-COVID” policy on June 17 for potentially causing serious damage to the global economy and foreign business with the resumption of lockdowns.
Disrupted supply chains for products such as rice, oil and natural gas have been scaled back in Shanghai, home to 25 million residents and the world’s largest port. China’s lockdowns recently affected an estimated 373 million people, including roughly 40% of the country’s gross domestic product (GDP).
U.S. COVID Deaths Near 1.018 Million People
U.S. COVID-19 deaths rose more than 1,000 in the past three days to 1,017,818, as of July 1, according to Johns Hopkins University. Cases in the United States climbed more than 500,000 during the last three days to 87,778,212. America still holds the dubious distinction as the nation with the largest number of COVID-19 deaths and cases.
COVID-19 deaths worldwide totaled 6,337,510 as of July 1, according to Johns Hopkins. Global COVID-19 cases reached 548,223,216 on July 1.
Roughly 78.3% of the U.S. population, or 259,957,415, have obtained at least one dose of a COVID-19 vaccine, as of July 1, the CDC reported. Fully vaccinated people total 222,271,398, or 66.9%, of America’s population, according to the CDC. The United States also has given at least one COVID-19 booster vaccine to 106.3 million people.
The five defense investments to purchase as Ukraine fights for its freedom in the face of Russia’s unabated invasion offer investors a chance to preserve their portfolios from the market’s worst risk, receive dividends for staying patient and pursue profitable returns. With the highest inflation in 41 years, a potential Fed rate hike of 0.75% possible for later this month and other rate increases to follow, the appeal of the five defense investments to purchase is strong, despite sustained supply chain disruptions and Russia’s punishing attacks on Ukraine.
Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, Guru Focus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is great as a gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others. Call 202-677-4457 for multiple-book pricing.