On the dawn of American Independence Day, it is only fitting that investors consider researching the potential of the defense sector. Companies in this industry often attract attention due to their alignment with national security priorities and ongoing government spending. The defense sector has gained paramount importance in recent years, especially in light of the prolonged conflicts between nations.
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During the recent NATO summit, members agreed to a new target of spending 5% of GDP on defense within the next decade, up from the previous 2% guideline. This increased budget is expected to benefit defense stocks, making them even more attractive to investors.
It is evident that the U.S. plays a crucial role in today’s war-torn world, and its defense companies garner significant attention for their advanced technology and strong performance. With this backdrop in mind, let’s look at three American defense companies that have been major contributors to the U.S. defense sector and continue to demonstrate considerable strength.
Lockheed Martin (LMT)
Lockheed Martin is indeed one of the largest defense contractors globally. It serves as a major supplier to government agencies, including NASA. The company manufactures a wide array of products, such as missiles, targeting systems, military helicopters, and mission systems for various vehicles. The company’s massive, long-term government contracts ensure a source of consistent and recurring revenue.
For reference, LMT was recently awarded a $2.97 billion missile defense system contract over a 10-year indefinite-delivery/indefinite-quantity period. LMT also trades at a discount to the sector average, with its current P/E (price-earnings per share) ratio at 21.70x. Moreover, LMT offers an attractive dividend yield of 2.83%, paying a regular quarterly dividend of $3.3 per share.
On TipRanks, the average Lockheed Martin price target of $527.15 implies a nearly 14% upside potential over the next 12 months. Also, seven analysts have given LMT stock a Buy rating, while six have rated it a Hold. Year-to-date, LMT stock has lost 3.5%.
Northrop Grumman (NOC)
Northrop Grumman is another promising aerospace and defense company, although it is smaller than Lockheed Martin. However, NOC has a different set of expertise, including autonomous systems, cybersecurity, strike platforms, logistics solutions, and C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance).
NOC is also one of NASA’s key suppliers, specializing in satellite technologies and space systems. NOC currently trades at a relatively low P/E ratio of 16.53x, making it an attractive stock. Additionally, it offers an above-industry-average dividend yield of 1.83%, and pays a regular dividend of $2.31 per share.
On TipRanks, the average Northrop Grumman price target of $541.36 implies 7.4% upside potential from current levels. 10 analysts have awarded NOC stock a Buy rating, while five have rated it a Hold. Year-to-date, NOC stock has gained 8.4%.
General Dynamics (GD)
General Dynamics also operates in the defense and aerospace sector, specializing in Gulfstream business jets, aircraft repair and maintenance, nuclear-powered submarines, commercial tankers and ships, main battle tanks, IT solutions, and intelligence and surveillance systems.
On July 2, General Dynamics Electric Boat was awarded a $1.85 billion contract modification to a previously awarded contract supporting submarine production. Moreover, it received a $150 million Army contract, and the GD Information Technology segment was awarded a $580 million contract to sustain force protection systems such as radars, cameras, and sensors worldwide. Additionally, GD pays a regular quarterly dividend of $1.5 per share, carrying an attractive dividend yield of 2.04%. Its P/E ratio stands at 19.33x.
On TipRanks, the average General Dynamics price target of $296.38 implies that shares are almost fully valued at current levels. Meanwhile, GD stock has gained 13.1% year-to-date. Also, six analysts each have given GD stock Buy and Hold ratings.
Which Is the Best Defense Stock?
Among the three stocks discussed above, Lockheed Martin appears to be the most favorably positioned, thanks to its well-diversified revenue stream, long-term government partnerships, healthy dividend yield, and reasonable valuation.