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Tickers in this Article: LMT, NOC, BA, GD, RTN, LLL
With the country captivated with the battle between Republicans and Democrats over what to cut to get the budget deficit under control, one area that seems to have avoided much attention is the defense sector. According to the government website, the Department of Defense spent $666.7 billion on military programs in 2010, and is expected to spend over 10% more in 2011 at $739.7 billion. With such an enormous amount being spent on the military, it seems inevitable that the defense sector will see deeper cuts in future years if the U.S. continues to struggle economically. TUTORIAL: Economic Indicators To Know

To put into perspective how much the U.S. spends on military, consider that the all the countries in the world spent a total of $1.6 trillion on military programs in 2010. The U.S. alone accounted for 42% of military expenditures. In a far distant second was China at 7.3%, or around $117 billion.

Possible Cuts in the Future
From strictly a budgetary standpoint, this appears like the easiest way for the U.S. to get their spending under control. However, from a political standpoint the situation becomes much harder. Some have pointed out that a cut the military budget at a time when U.S. troops are risking their lives in wars overseas would be unsupportive of troops and unpatriotic. These reasons alone could easily be enough to shelve defense cuts until the wars wind down. But in the long-term, you shouldn't be surprised if the Department of Defense budget is one area the White House looks to for significant cuts.

Who Will Be Affected
Clearly a big cut in military spending would be a negative development for the U.S. defense contractors that rely on the U.S. government for the majority of their revenues. This sector can be very vulnerable to shifts in the political landscape and the uncertainty with the United States' financial situation poses as a key risk to this sector. Two of the largest defense contractors likely to be affected by government cuts are Lockheed Martin and Northrop Grumman.

Last year, Lockheed Martin generated approximately 84% of their revenue with sales to the U.S. government. Northrop Grumman received 91% of their sales from the U.S. government. Both percentages show the high degree of dependence these companies have to the government.

Market Cap
Percentage of sales to U.S. Government
Lockheed Martin (LMT)
$25.8 B
Northrop Grumman (NOC)
$18.4 B
Bottom Line
These are not the only companies that would be affected by a reduction in military spending. Other large defense contractors that would be affected include Boeing (NYSE:BA), General Dynamics (NYSE:GD), Raytheon (NYSE:RTN), L-3 Communications (NYSE:LLL) and many others. Investors should tread cautiously and consider both the reliance of these companies on the government as well as the projected long-term trend of the U.S. budget before investing in this sector. (For additional reading, check out Austerity: When The Government Tightens Its Belt.)

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