Seven Aerospace-Defense Investments to Purchase for Income

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Seven aerospace-defense investments to purchase for income and growth feature two funds and five flight-worthy stocks.

The seven aerospace-defense investments to purchase for income have received recommendations from seasoned stock market forecasters who praise their prospects for ascending further. With war raging, demand is growing for companies supplying the U.S. military and its allies with weapons and equipment to defend freedom.

The seven aerospace-defense investments to purchase for income amid escalating conflicts and combat continue to have tailwinds carrying them forward. Current catalysts include increased military spending by the U.S. Department of Defense and countries in the North Atlantic Treaty Organization (NATO).

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The commercial aerospace recovery is seen as strong enough to cut through economic uncertainty, according to BofA Global Research. Defense spending is necessary due to mounting geopolitical security risks, BofA added.

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Seven Aerospace-Defense Investments to Purchase for Income: PPA

The ETF with the highest returns over most time periods and that surged ahead of the others in the last year or so is Invesco Aerospace & Defense (PPA), which tracks the SPADE Defense Index, said Bob Carlson, a former pension fund chairman who heads the monthly Retirement Watch investment newsletter. The ETF pays a dividend yield of 0.60%. Many of the investments Carlson recommends in his Retirement Watch newsletter feature ETFs that he watches closely to update his favorites each month.

Bob Carlson, who heads Retirement Watch, answers questions from Paul Dykewicz.

Roughly 89.2% of the fund is invested in the industrials sector, with technology accounting for 10.7%. The stocks in the fund tend to sell at lower valuations than the broad market indexes and pay higher dividends, Carlson said.

PPA recently owned 51 stocks, and 53% of the fund was in its 10 largest positions.

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The top five positions were RTX (NYSE: RTX), Lockheed Martin (NYSE: LMT), Boeing (NYSE: BA), GE Aerospace (NYSE: GE) and General Dynamics (NYSE: GD). Each of the first four holdings composes more than 5% of the fund, while GD accounts for 4.93%.

PPA dipped 1.10% in the last month, rose 4.43% in the past three months, 11.84% for the year to date and 25.25% during the last 12 months. Its 10-year average annualized return is 13.21%.

Chart courtesy of www.stockcharts.com

The fund seeks to track the investment results, before fees and expenses, of the SPADE Defense Index. Generally, the fund invests at least 90% of its total assets in securities that comprise the underlying index. That index consists of common stocks of companies that are important to the defense sector and are involved with the development, manufacture, operation and support of U.S. defense, military, national/homeland security and government space operations.

Seven Aerospace-Defense Investments to Purchase for Income: XAR

Carlson also praised the dividend-paying SPDR S&P Aerospace and Defense (XAR), an ETF designed to track the S&P Aerospace & Defense Select Industry Index. XAR recently had 32 equity holdings with 44% of the fund in the 10 largest positions, while paying a dividend yield of 0.54%.

The five largest XAR holdings, all greater than 4% of the fund, and their respective share of the fund’s holdings, are: AeroVironment Inc. (NASDAQ: AVAV), 4.90%; Woodward Inc. (NASDAQ: WWD), 4.71%; Howmet Aerospace Inc. (NYSE: HWM), 4.61%; HEICO Corp. (NYSE: HEI), 4.53%; and RTX Corp. (NYSE: RTX), 4.40%.

The dividend-paying fund has been fairly flat the past month, dipping 0.64%, while rising 1.59% in the last three months, 4.3% year to date, 17.93% for the past year and an average 11.77% annually for the past 10 years.

Chart courtesy of www.stockcharts.com

Seven Aerospace-Defense Investments to Purchase for Income: Bombardier 

Montreal-based Bombardier (XTSE: BBD.B) has navigated its way through a turbulent turnaround, according to a recent research report by BofA Global Research defense and aerospace analyst Ron Epstein. He upgraded Bombardier to “buy” from “underperform.”

The rating is even more impressive since BofA likened the challenge of Bombardier surmounting adverse conditions as an aircraft and aerospace parts manufacturer to “climbing Mt. Everest.” After reaching the peak of post-COVID BizJet demand, the company’s aviation business is overtaking pre-COVID 2019 levels.

That performance lends support to the company’s near-term strategy, Epstein wrote in his research note. With Bombardier now focused on harvesting its installed base, growing its aftermarket business and remaining disciplined on capital deployment, BofA is forecasting opportunities for potential upside. Bombardier’s strategy seems to be working so well that Epstein more than doubled his price target on the stock to C$120 from C$52.

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Chart courtesy of www.stockcharts.com

Seven Aerospace-Defense Investments to Purchase for Income: Ascending

Even though Bombardier took a conservative approach and reiterated its 2025 financial outlook, Epstein wrote that it signaled the outlook is pragmatic and its management is more measured and thoughtful with its forecasting compared to prior history. Additionally, BofA viewed the targets as more attainable given the increased focus on aftermarket and growing installed fleet to support growth in the segment.

Bombardier also maintained its position that there is no need for a so-called clean sheet design of a new aircraft anytime soon. Instead, to the benefit of free cash flow (FCF) and returning capital to shareholders, improvements on the existing fleet and derivatives take precedent, BofA wrote.

“While there won’t be any new aircraft for now, the Global8000 continues through its certification process and is expected to enter into service in 2025,” Epstein wrote. Bombardier’s leadership counseled that if there were a new compelling technology, then it would be time for a clean-sheet design, he added.

“The area where we do see the most risk is BBD’s aspirations for acquisitions,” Epstein wrote. “BBD named acquisitions to support growth in both its aftermarket and defense segments as a key priority. While M&A is not inherently a negative, others in our coverage, with far more M&A activity, have noted assets coming to market are being priced at rich premiums. We see the most risk for BBD to overpay to increase their aftermarket exposure or take on debt at higher rates to the detriment of EPS and returning cash.”

Seven Aerospace-Defense Investments to Purchase for Income: Honeywell

The idiom, “one man’s loss is another man’s gain,” captures what has been occurring in the aerospace-defense industry. Production problems and cash concerns at Boeing Inc. (NYSE: BA) appear likely to drive reduced growth in original operating equipment (OEM), such as new aircraft, while boosting the demand for aftermarket parts and equipment.

The management of Charlotte, North Carolina-based Honeywell International Inc. (NASDAQ: HON) recently met with analysts at BofA Global Research and indicated expectations that aftermarket sales would climb if OEM slowed. This is consistent with the message from other aerospace suppliers, BofA wrote.

Honeywell leaders suggested that the Federal Aviation Administration (FAA) will require Boeing to build inventory buffer in its supply chain, aiding OEM growth amid slowing production. A diversified, global technology and manufacturing company, Honeywell’s operations consist of four business groups: Aerospace Technologies, Industrial Automation, Building Automation and Energy & Sustainability Solutions.

The company is a “premier supplier” of avionics, power and control systems for the aerospace industry, BofA Global Research wrote in a research note. Honeywell has executed well in a volatile macro environment, causing BofA to express optimism about recent initiatives that include increased spending on research and development (R&D), as well as internal automation investment that could become a structural shift to reinvest in the business.

In addition, Honeywell has strong pricing power to offset rising costs. Based on such strengths, BofA has given Honeywell a “buy” rating and a price objective of $250, with a multiple of 16x 2025 estimated EV/EBITDA. The target multiple set by BofA is in line with peers trading at 16x on 2024 estimates. The investment firm wrote that the in-line valuation is warranted as top-quartile execution is offset by near-term end market headwinds.

Chart courtesy of www.stockcharts.com

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Mark Skousen, PhD, who is rated one of the top 20 most influential living economists by SuperScholar.org, also writes the monthly Forecasts & Strategies investment newsletter and the TNT Trader advisory service that he runs with his son Todd Skousen to provide both stock and option recommendations. Mark Skousen, a President Fellow at Chapman University, recommends Honeywell as a profitable holding in his Forecasts & Strategies investment newsletter. He wrote in the June issue of Forecasts & Strategies that Honeywell is a conservative choice for investors seeking both income and growth.


Ben Franklin scion Mark Skousen, who heads Forecasts & Strategies, talks to Paul Dykewicz.

Seven Aerospace-Defense Investments to Purchase for Income: Howmet

Howmet Aerospace (NYSE: HWM), an advanced engineering company in Pittsburgh, received a buy recommendation and a $45 a share price target from BoA Global Research. Howmet provides some critical components in the F-35 joint strike fighter that hits Mach 1.6 under the thrust of possibly the most advanced engine on earth. The joint strike fighter is built with cutting-edge materials, integrated airframe design and next-generation avionics to enable this fifth-generation fighter jet to operate with unprecedented stealth, speed and agility in air-to-air and air-to-ground combat, company officials said.

In developing this complex fighter jet, Lockheed Martin (NYSE: LMT) turned to Howmet to provide key parts that include single-piece, forged aluminum bulkheads that form the “backbone” of the aircraft structure and save 300 to 400 pounds per jet, while cutting costs by 20%. The fighter jet also has titanium bulkheads and uses titanium to manufacture other airframe structures for all three F-35 JSF variants. Howmet further supplies single-crystal, nickel-based superalloy blades and vanes that operate in environments hotter than the melting point of the metal to propel the engine.

Joint Strike Fighter Is a Multirole Combat Jet Capable of Flying at Mach 1.6.

To hold together the design, Howmet’s vibration-resistant fasteners are engineered to endure extreme G-forces and performance requirements. From nose to tail, Howmet Aerospace helps its customers meet aggressive weight, range and fuel efficiency targets to enable the F-35 to do what other military aircraft cannot, according to Howmet statement.

Not only is Howmet another “buy” recommendation of  BofA Global Research, it also is a favorite defense investment of Michelle Connell, owner and president of Dallas-based Portia Capital Management LLC. Focused on wealth management for private investors and non-profit institutions, Connell advised that Howmet has strong financial fundamentals, including gross margins of 28% and returns of equity above 20%. For the last quarter, and despite weakness in demand by Boeing for its 737 MAX, the company was able to meet its revenue and profit estimates, she added.

Plus, demand is strong enough for Howmet to keep the remainder of its 2024 estimates in place, Connell said. The company beat free cash flow estimates of $400 million last quarter and its rising cash flow is expected to be a long-term trend, she continued.

Michelle Connell leads Dallas-based Portia Capital Management.

“Due to the continued build-out of air fleets, defense and commercial, HWM has had great performance,” Connell said.

For income investors, Connell pointed out that Howmet is increasing its dividend, albeit a small one, by 40% this year.

“Like its larger peers, analysts anticipate HWM to become a strong dividend payer over the next few years,” Connell said.

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Seven Aerospace-Defense Investments to Purchase for Income: Heico

Hollywood, Florida-based Heico Corporation (NYSE: HEI), rated as “outperform by the William Blair investment firm in Chicago, announced in January 2024 that its Sunshine Avionics subsidiary entered an exclusive perpetual license and acquired key assets from Honeywell to produce, sell and repair Boeing 737NG and Boeing 777 Cockpit Displays and Legacy Displays. Financial terms for the transaction were not disclosed, but Heico leaders said the purchase would be accretive to earnings in the year after the transaction’s closing.

In October 2023, VSE Corporation (NASDAQ: VSEC) established a similar licensing agreement with Honeywell for fuel control systems, with VSE paying $105 million for that transaction. The deals show Honeywell’s willingness to divest aerospace assets and licenses to others like Heico and VSE.

In addition, Heico is integrating Wencor into its business, wrote Louie DiPalma, an aerospace and defense analyst with Chicago-based investment firm William Blair. Heico paid $2.1 billion for Wencor.

However, Heico’s management previously had expressed an interest in reducing its debt and not focusing on acquisitions within its Flight Support Group, DiPalma wrote in a research note.

“In our view, the biggest risk to Heico shares is another COVID-like pandemic reducing demand for air travel,”  DiPalma continued.

Chart courtesy of www.stockcharts.com

Heico also is a buy recommendation of BofA Global Research and others, so it is not without a base of analysts who approve of its strategic business moves.

Seven Aerospace-Defense Investments to Purchase for Income: General Dynamics

General Dynamics (NYSE: GD), headquartered in Falls Church, Virginia, provides land combat vehicles, weapons systems and munitions, ship construction and repair, and technology products and services. In addition, General Dynamics is a leader in the business aviation industry through its Gulfstream and Jet Aviation subsidiaries. Overall, General Dynamics operates in four main segments: Combat Systems, Aerospace, Marine Systems and Technologies.

The company notched an overall operating margin of 11.0%, with margins of 15% in Aerospace, 14.4% from Combat Systems, 9.5% with Technologies and 7.6% by Marine Systems. Citigroup rates shares of General Dynamics as a “Buy.”

The investment bank recommends building positions in the company due to:

1) An Aerospace segment growth outlook lifted by recent order trends and a backlog that gives earnings upside for the next several years;

2) Marine segment growth prospects and improved margins as the company’s labor force and supply chain normalize post-pandemic;

3) Rising demand for the Combat Systems segment as the United States and its NATO allies prepare plans for increased military spending to deter further land-based conflicts in Europe; and

4) Increasing valuation for defense prime contractors.

Chart courtesy of www.stockcharts.com

Seven Aerospace-Defense Investments to Purchase for Income: Citigroup’s View

Citigroup recently boosted its 12-month price target for GD to $320, up from $300, based on a 19x price/earnings (P/E) multiple on its estimates a year from now. However, there are risks that include the business jet industry’s vulnerability to unpredictable shocks that cannot be incorporated into earnings models, such as terrorism and epidemics (COVID/SARS).

“Furthermore, the industry has historically been correlated to economic growth,” wrote Citigroup defense and aerospace analyst Jason Gursky. “The company’s other exposure is the defense market, which is subject to changes in political will, global threats to the U.S. and its allies, the state of the federal budget and the condition of existing U.S. and allied military equipment. General Dynamics shares may materially underperform our price target should the economy enter a prolonged recession that results in decreased business jet orders and flight hours. Shares would also likely underperform to the extent that global peace broke out and DoD budgets were severely cut.”

DiPalma, of William Blair, also likes General Dynamics as an investment. He currently has an “outperform” rating on the stock.

A third fan of the stock is Jim Woods, a former Army paratrooper who recommends it in the Income Multipliers portfolio for his Successful Investing newsletter subscribers. As a former military man, Woods has a keen interest in defense issues and follows them closely for his Successful Investing subscribers.

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Jim Woods leads Successful Investing and co-heads Fast Money Alert.

Russia’s Putin Calls for Ukraine to Abandon Territory as War Rages

Russia’s President Vladimir Putin called on Friday, June 14, for Ukraine to agree to give up control of its territories he claims to have annexed, withdraw from those lands and commit not join NATO. Ukraine’s President Volodymyr Zelensky responded the same day that the Russian dictator would not stop the current offensive, even if his demands were met.

U.S. Secretary of Defense Lloyd Austin pointed out that Putin is illegally occupying Ukraine’s sovereign territory and lacks the right to dictate to Ukraine what it should do achieve peace. Austin, speaking in Brussels, Belgium, at a meeting of defense ministers of NATO member countries, added that Putin could end the war today by leaving Ukraine’s sovereign territory.

Hamas Rejects U.S. Ceasefire Proposal Approved by UN Security Council

Hamas leaders reportedly rejected to a ceasefire proposal on Tuesday, June 11, offered by U.S. President Biden and approved by the United Nations Security Council. Israeli officials said the reply was “tantamount” to an outright rejection of the terms.

Hamas “changed all of the main and most meaningful parameters,” an Israeli government source said. The militant group leaders also rejected the proposal for a hostage release supported by President Biden, the source added.

The ceasefire proposal would have brought home living hostages taken from Israel and those who died while held by Hamas militants who seized them during its brutal raid on Oct. 7. The plan also called for increased humanitarian aid, as well as an exchange of some Palestinian prisoners held in Israel.

The end goal was a permanent “cessation of hostilities” and a major reconstruction plan for Gaza. The United States recently also recently faced a severe setback when a $300 million pier quickly erected by the U.S. military to disperse desperately needed food, liquids, medicine and other aid to civilians in Gaza broke apart amid rough seas. However, the pier was repaired within just weeks to allow the resumption of much needed aid.

Israel successfully rescued four hostages on Saturday, June 8, held in Gaza by Hamas militants, but the mission also involved the death of Palestinians and one Israeli Defense Forces commander who participated in the rescue operation. Since Hamas leaders and fighters embed themselves among the civilian population in Gaza, the loss of human life during combat has been heavy. Nonetheless, Hamas leaders passed up a chance to end the hostilities by not approving the ceasefire proposal.

Israel leaders are trying to find and destroy an extensive tunnel system in neighboring Gaza that has been used to store weapons, as well as hide the Hamas leaders and militants who were responsible for the Oct. 7 raid in Israel that killed an estimated 1,200 people and took 240 hostages into Gaza. Clashes continue in the city of Rafah in Gaza, where Hamas militants remain in the midst of a large Palestinian civilian population.

The Gaza Ministry of Health estimates that more than 37,000 Hamas fighters and Palestinian civilians have lost their lives since the war began Oct. 7.

The seven dividend-paying aerospace-defense investments to buy are benefitting from strong demand amid ongoing wars. Income investors who also aim for share price appreciation traditionally can gain it from defense stocks as war-related demand soars.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street JournalInvestor’s Business DailyUSA 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. Special Sale for Graduation Season! Paul 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 uplifting book is great gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many othersCall 202-677-4457 for reduced pricing on multiple-book purchases.

 

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Paul Dykewicz

Paul Dykewicz, www.pauldykewicz.com, is a respected, award-winning journalist who has written for Dow Jones, the Wall Street JournalInvestor’s Business DailyUSA Today, the Journal of Commerce, Crain Communications, Seeking Alpha, Guru Focus and other publications and websites. Paul can be followed on Twitter @PaulDykewicz, and is the editor and a columnist at StockInvestor.com and DividendInvestor.com. He also serves as editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free weekly e-letters and other investment reports.

Paul 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. In addition, Paul serves as a commentator about investing, economics, business news, politics and motivational guidance. 

Paul earned a master’s degree in business administration with a focus on finance at Baltimore’s Johns Hopkins University, where he was elected to two terms as president of its Finance Club. He earlier received a master’s degree from Michigan State University’s School of Journalism, where he was inducted into the Kappa Tau Alpha honor society. Paul received a bachelor’s degree from the University of Michigan in Ann Arbor, focusing on political science, business and economics.

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