The massive rally driven by the Bank of England’s ridiculous foray back into quantitative easing was a one and done. Now investors are faced with the stark reality of ending the quarter with a deluge of selling from institutional accounts all over Wall Street. With the final second-quarter gross domestic product reading coming in at the expected level of −0.6%, technically we are indeed in a recession now. With all the additional data (low first-time applications for unemployment) giving the Federal Reserve some cover, you can almost count on a 75-basis-point increase in the federal funds rate in early November.
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So where should investors look to deploy capital in such an environment? We have always maintained that the best offense in difficult times is good defense (as in defense and aerospace stocks). While the football metaphor may not be in any economics 101 textbooks, it has proven to play out well for investors over the past 20 years.
With the Russian-Ukrainian war now grinding into its eighth month, not only are arms and heavy equipment being hustled to Ukraine, but many countries have taken the aggression very seriously and are adding to their own arsenals. The Japanese ruling party has called for the doubling of defense spending in the wake of Chinese saber-rattling over Taiwan. European nations are trending the same way.
We screened our 24/7 Wall St. aerospace and defense research database looking for the top stocks that are Buy-rated on Wall Street and come with solid and dependable dividends. Six top picks hit our screens. While they are rated Buy, it is important to remember that no single analyst report should be used as the sole basis for any buying or selling decision.
General Dynamics
Like other major defense contractors, General Dynamics Corp. (NYSE: GD) looks poised to deliver solid numbers and guidance the rest of this year and perhaps beyond. It is engaged in business aviation, land and expeditionary combat vehicles and systems, armaments, munitions, shipbuilding and marine systems, and information systems and technologies.
Major products include Virginia-class nuclear-powered submarine and Ohio class replacement, Arleigh Burke-class Aegis, Abrams M1A2 tank, Stryker 8-wheeled assault vehicle, medium-caliber munitions and gun systems, tactical and strategic mission systems.
Top analysts expect the company to modestly beat earnings expectations for the third quarter and possibly raise guidance. They also expect solid numbers from the Gulfstream division.
Investors receive a 2.27% dividend. Wells Fargo has a price target of $249 on General Dynamics stock. The consensus target is higher at $263.94. The shares closed on Thursday at $214.43 apiece.
24/7 Wall St.Huntington Ingalls Industries
Spun off from Northrop Grumman in 2011, this is a premier military shipbuilding company. Huntington Ingalls Industries Inc. (NYSE: HII) engages in designing, building, overhauling and repairing military ships in the United States.
Huntington Ingalls is involved in the design and construction of non-nuclear ships, comprising amphibious assault ships, expeditionary warfare ships, surface combatants and national security cutters for the U.S. Navy and U.S. Coast Guard. It also provides nuclear-powered ships, such as aircraft carriers and submarines, as well as refueling, overhaul and inactivation services of ships.
In addition, the company offers naval nuclear support services, including fleet services comprising design, construction, maintenance and disposal activities for in-service of U.S. Navy nuclear ships, as well as maintenance services on nuclear reactor prototypes.
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Huntington Ingalls also provides life-cycle sustainment services to the U.S. Navy fleet and other maritime customers; high-end information technology and mission-based solutions for U.S. Department of Defense, intelligence and federal civilian customers; nuclear management and operations and environmental management services for the Department of Energy, Defense Department, state and local governments, and private sector companies; defense and federal solutions; and unmanned systems.
Shareholders receive a 2.05% dividend. Cowen’s $270 target price is above the $247.56 consensus target for Huntington Ingalls Industries stock. Thursday’s close was at $223.33 a share.
Lockheed Martin
This is another top aerospace and defense stock to buy, and it still offers investors looking to buy shares a solid entry point. Lockheed Martin Corp. (NYSE: LMT) researches, designs, develops, manufactures, integrates, operates and sustains advanced technology systems, products and services. It also provides a wide range of defense electronics products and IT services.
Being the Pentagon’s prime contractor, Lockheed Martin offers a diverse portfolio of global aerospace, defense, security and advanced technologies. Its leveraged presence in the Army, Air Force, Navy and IT programs guarantees a steady inflow of follow-on orders, not only from the U.S. government but also from many foreign allies of the nation.
Over the past several years, Lockheed Martin’s backlog has substantially outgrown the rest of the industry, supporting the growth outlook for the foreseeable future. The company has exposure to Defense Department priority buckets and consistently executes well. Even if the end market growth rate slows, continued strong fundamentals can be expected, with compounding earnings and cash flows.
The dividend yield here is 2.71%. The $522 Morgan Stanley price objective compares with a consensus target of $459.79. Lockheed Martin stock closed on Thursday at $389.79.
24/7 Wall St.L3 Harris Technologies
After its 2019 merger, this became the sixth-largest defense company. L3 Harris Technologies Inc. (NYSE: LHX) is an agile global aerospace and defense technology innovator engaged in the provision of defense and commercial technologies across air, land, sea, space and cyber domains.
Its Integrated Mission Systems segment includes intelligence, surveillance and reconnaissance; advanced electro optical and infrared; and maritime power and navigation. The Space and Airborne Systems segment comprises space payloads, sensors and full-mission solutions; classified intelligence and cyber defense; avionics; and electronic warfare.
Top Wall Street analysts have felt for some time that L3 Harris Technologies is situated well in the high growth buckets of the Defense Department budget, and many believe the business is not as short-cycle as the market historically has perceived. Merger synergies give the business a unique path to cash flow and margin upside, along with above-average revenue growth.
L3 Harris Technologies stock comes with a 2.03% dividend. Royal Bank of Canada has set its price target at $285, well above the consensus target. The stock was last seen on Thursday trading at $209.35.
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Northrop Grumman
This was ranked as one of the top five defense contractors by sales last year, and it is on the BofA Securities US 1 list of top stock picks. Northrop Grumman Corp. (NYSE: NOC) provides innovative systems, products and solutions in unmanned systems, cyber, C4ISR and logistics and modernization to government and commercial customers worldwide.
The Aerospace Systems segment designs, develops, integrates and produces manned aircraft, unmanned systems, spacecraft, high-energy laser systems, microelectronics and other systems and subsystems.
The Information Systems segment offers advanced solutions for the Defense Department, national intelligence and federal civilian, state, international and commercial customers. It provides products and services primarily in the fields of command and control, communications, cyber, air and missile defense, intelligence processing, civil security, health information technology, and government support systems.
The Technical Services segment provides logistics, modernization and sustainment services, as well as other advanced technology and engineering services, including space, missile defense, nuclear security, training and simulation services.
Shareholders receive a 1.57% dividend. Northrop Grumman stock has a $550 target price at BofA Securities. The consensus target is lower at $513.12, and shares closed at $470.48 on Thursday.
Raytheon Technologies
This top aerospace and defense idea has a diversified mix of businesses. Raytheon Technologies Corp. (NYSE: RTX) is an industry leader in defense, government electronics, space, information technology and technical services.
With a history of innovation spanning 97 years, Raytheon provides state-of-the-art electronics, mission systems integration, C5I products and services, sensing, effects and mission support for customers in more than 80 countries.
In 2020, United Technologies and Raytheon agreed to merge their businesses to create this new aerospace and defense powerhouse. The two-year-old merger, combined with the spin-off of the Carrier and Otis divisions in 2020, has top analysts across Wall Street expecting free cash flow to step up in a big way this year. Toss in the solid recovery in air travel and improving sentiment that could help drive the commercial aerospace business.
Investors receive a 2.68% dividend. Morgan Stanley analysts have a price objective of $124. The consensus target is $108.83, and Raytheon Technologies stock closed on Thursday at $82.34.
The stock market is in a bear market, and very possibly has the potential to trade down an additional 15% from current levels. With the geopolitical situations in various parts of the world quite tense, and on-the-ground fighting raging in Ukraine, it is a good bet these companies will continue to receive orders from around the world. For now, these top stocks may be among the safer ideas for the rest of the year and into 2023.
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