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The Contrarian Play In Defense
Given the enormous scope of the United States budget woes, it's almost assured that every segment of federal spending will see some sort of spending cut. With a budget of nearly $663 billion, many policy makers and analysts believe that cuts to military spending will be in our future. Since the debt ceiling debacle, stocks within the sector have sold off hard over the last few weeks. The sector-based PowerShares Aerospace & Defense ETF (NYSE:PPA) is well below its 52-week high. However, despite government spending being the sector's Achilles heel, many of these stocks now sit firmly within the value category and pay big dividends.
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Falling Hard
Accounting for 43% of the world's military budget, it's no wonder military spending is a hot-button issue in balancing America's balance sheet. The recently passed Budget Control Act of 2011 calls for $1 trillion in defense and non-defense spending cuts over the next 10 years, and an appointed super-committee has been given the task of finding an additional $1.2 trillion in reductions. As these recent budget battles in Washington have continued to rage, the defense sector has seen its fortunes fade. Over the last six months, aerospace and defense firms have lost more than 22%. That compares to a 16% loss for the S&P 500 during that time. The kicker for the sector has been the "automatic" $600 billion slashing of defense spending if the committee fails in its mission.
However, all isn't lost for the aerospace sector. First, the $600 billion in automatic cuts accounts for future spending, leaving some wiggle room for Congress to act. Even if the military budget is cut in half, that still leaves more than $300 billion in spending - far more than any other industrialized nation spends.
Branching Out Into Other Sectors
Perhaps more importantly, many of the largest defense firms have been branching out into other sectors to diversify away from U.S. military spending. For example, Boeing (NYSE:BA) still receives more than half of its revenue from its commercial airlines business. In addition, as our data moves to the cloud and our electric grid becomes smart, securing all the networks of the world will be a major task. Analysts estimate that billions must be spent by both public and private entities on cyber security, and many of the largest defense firms have been moving into this area. Finally, the large defense firms are becoming more global and will benefit from stronger spending from NATO nations like Canada and Australia.
Picking up the Big Dividends
Given the resulting sell-off that has hit the defense firms, investors looking to scoop up values and treasury-beating dividends might want to consider the sector. The iShares Dow Jones US Aerospace & Defense (NYSE:ITA) follows a basket of 33 different firms, including L-3 Communications (NYSE:LLL), and could be used as a broad way to access the sector. However, for investors looking toward individual stocks, avoiding smaller firms such as Force Protection (Nasdaq:FRPT) could be in order as they are more susceptible to budget woes.
Aside from its military operations, General Dynamics (NYSE:GD) is benefiting from its commercial business jet division. By expanding into emerging markets, the company is poised to gain from the world's new rich elite. Shares of General Dynamics currently yield a juicy 3.2%.
Both Raytheon (NYSE:RTN) and Lockheed Martin (NYSE:LMT) have been moving rather quickly into the realm of cyber security and smart grid management. Both have won major grants from the Department of Energy, and Lockheed has also provided micro-grid applications to several ventures. Raytheon and Lockheed both yield 4.2%.
The Bottom Line
With budget cuts coming to the aerospace and defense sector, many of the stocks within the group have fallen hard over the last few weeks. However, much of this fall is unjustified. For investors, the major defense firms such as Northrop Grumman (NYSE:NOC) offer portfolios major values and dividends. (For additional reading, see War's Influence On Wall Street.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
Falling Hard
Accounting for 43% of the world's military budget, it's no wonder military spending is a hot-button issue in balancing America's balance sheet. The recently passed Budget Control Act of 2011 calls for $1 trillion in defense and non-defense spending cuts over the next 10 years, and an appointed super-committee has been given the task of finding an additional $1.2 trillion in reductions. As these recent budget battles in Washington have continued to rage, the defense sector has seen its fortunes fade. Over the last six months, aerospace and defense firms have lost more than 22%. That compares to a 16% loss for the S&P 500 during that time. The kicker for the sector has been the "automatic" $600 billion slashing of defense spending if the committee fails in its mission.
However, all isn't lost for the aerospace sector. First, the $600 billion in automatic cuts accounts for future spending, leaving some wiggle room for Congress to act. Even if the military budget is cut in half, that still leaves more than $300 billion in spending - far more than any other industrialized nation spends.
Branching Out Into Other Sectors
Perhaps more importantly, many of the largest defense firms have been branching out into other sectors to diversify away from U.S. military spending. For example, Boeing (NYSE:BA) still receives more than half of its revenue from its commercial airlines business. In addition, as our data moves to the cloud and our electric grid becomes smart, securing all the networks of the world will be a major task. Analysts estimate that billions must be spent by both public and private entities on cyber security, and many of the largest defense firms have been moving into this area. Finally, the large defense firms are becoming more global and will benefit from stronger spending from NATO nations like Canada and Australia.
Picking up the Big Dividends
Given the resulting sell-off that has hit the defense firms, investors looking to scoop up values and treasury-beating dividends might want to consider the sector. The iShares Dow Jones US Aerospace & Defense (NYSE:ITA) follows a basket of 33 different firms, including L-3 Communications (NYSE:LLL), and could be used as a broad way to access the sector. However, for investors looking toward individual stocks, avoiding smaller firms such as Force Protection (Nasdaq:FRPT) could be in order as they are more susceptible to budget woes.
Both Raytheon (NYSE:RTN) and Lockheed Martin (NYSE:LMT) have been moving rather quickly into the realm of cyber security and smart grid management. Both have won major grants from the Department of Energy, and Lockheed has also provided micro-grid applications to several ventures. Raytheon and Lockheed both yield 4.2%.
The Bottom Line
With budget cuts coming to the aerospace and defense sector, many of the stocks within the group have fallen hard over the last few weeks. However, much of this fall is unjustified. For investors, the major defense firms such as Northrop Grumman (NYSE:NOC) offer portfolios major values and dividends. (For additional reading, see War's Influence On Wall Street.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Aaron Levitt
Aaron Levitt is a SABEW investment journalist and analyst living in State College, Pennsylvania. His work appears in several high profile publications in both print and on the web. Aaron is a graduate of The Pennsylvania State University where he studied Economics and International Business and he is an advocate for long-term investing with a global framework. You can follow his picks and pans at @AaronLevitt
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