Rising geopolitical tensions and the escalating intricacy of modern warfare have spurred substantial growth in the global air defense system market. So, bullish investors looking for smart investments could consider quality defense stocks General Dynamics Corporation (GD), Textron Inc. (TXT), and Elbit Systems Ltd. (ESLT) this year. These companies also pay stable dividends.
The previous year saw a rapid rise in geopolitical conflicts. As a result, the broader aerospace and defense sector saw a surge in stock prices, exemplified by a 19.7% gain in the iShares U.S. Aerospace & Defense ETF (ITA) over the past three months, compared to the S&P 500’s 11.2% gain.
Besides, the surging geopolitical conflicts such as the Russia-Ukraine and Israel-Hamas conflicts have prompted nations to reassess and elevate their military spending. As a result, the US Congress' approved a $886 billion defense budget for 2024, which signals significant opportunities for the US defense industry. With a focus on enhancing deterrence in the Indo-Pacific region to counter China, US defense companies are likely to experience increased demand.
In addition, the evolving nature of security threats, including cyber warfare and terrorism, further fuels the demand for advanced defense technologies and capabilities. Military alliances, emerging technologies like artificial intelligence, and the imperative of maintaining a technological edge in the face of global power competition are additional catalysts for heightened defense investments.
According to a report by MarketsandMarkets, the global defense market is estimated to have reached a value of over $2 trillion in 2023. The market is expected to grow at a CAGR of 4.9% and reach above $2.54 trillion by 2028.
Given the industry tailwinds, it's time to examine the fundamentals of the top three stocks in the Air/Defense Services industry, starting with the third in line.
Stock #3: General Dynamics Corporation (GD)
GD operates as an aerospace and defense company worldwide. It operates through four segments: Aerospace; Marine Systems; Combat Systems; and Technologies.
On December 20, GD announced that it was awarded four contracts cumulatively valued at up to CAD1.68 billion ($1.26 billion) by the Government of Canada to support the Land Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) system for the Canadian Army.
On December 6, GD’s board of directors declared a regular quarterly dividend of $1.32 per share on the company’s common stock, payable on February 9, 2024.
The annual dividend rate of $5.28 per share for this company results in a 2.03% dividend yield based on the current share price. Over the past four years, the average yield has been 2.42%. The company's dividend payments have demonstrated compound annual growth rates (CAGRs) of 6.5% and 7.5% over the last three and five years, respectively. Notably, the company has consistently increased dividend payouts for 29 consecutive years.
During the fiscal third quarter that ended October 1, 2023, GD’s revenue increased 6% year-over-year to $10.57 billion, while operating earnings stood at $1.06 billion. Moreover, its free cash flow increased 6.4% from the prior-year quarter to $1.09 billion. Net earnings and EPS stood at $2.31 billion and $8.39, respectively.
As of October 1, 2023, its total current assets stood at 22.78 billion, compared to $21.06 billion as of December 31, 2022.
Street expects GD’s revenue and EPS for the fiscal fourth quarter ending December 2023 to increase 12.8% and 16.5% year-over-year to $12.24 billion and $4.17, respectively. The company surpassed consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 20.2% over the past six months to close the last trading session at $258.60. Over the past three months, it has soared 16%.
GD’s robust fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
GD has a B grade for Momentum and Stability. Within the 73-stock Air/Defense Services industry, it is ranked #11.
Beyond what we’ve stated above, we have also rated the stock for Growth, Value, Sentiment, and Quality. Get all ratings of GD here.
Stock #2: Elbit Systems Ltd. (ESLT)
Headquartered in Haifa, Israel, ESLT develops and supplies a portfolio of airborne, land, and naval systems and products for defense, homeland security, and commercial aviation applications, primarily in Israel. The company operates through Aerospace; C4I and Cyber; ISTAR and EW; Land; and Elbit Systems of America segments.
On December 18, ESLT announced a series of contracts awarded by the Israel Ministry of Defense (IMOD) in a significant amount, following increased demand for the company's solutions since the start of the Swords of Iron War. The heightened demand is notable compared to routine levels, and potential future developments may lead to additional substantial orders.
On November 29, ESLT announced that its U.S. subsidiary, Elbit Systems of America, received a $500 million indefinite delivery/indefinite quantity (ID/IQ) contract from the U.S. Department of Defense.
The contract is for the supply of Squad Binocular Night Vision Goggle (SBNVG) systems, along with spare parts, logistics support, and test article refurbishment.
ESLT pays a $2 per share dividend annually, translating to a 0.94% yield on the current share price. Its four-year average dividend yield is 1.12%. The company’s dividend payouts have grown at a CAGR of 6.2% over the past three years.
ESLT’s revenues increased 11.3% year-over-year to $1.50 billion in the fiscal third quarter that ended September 30, 2023. Its non-GAAP gross profit stood at $373.80 million, up 10.6% year-over-year. The company’s operating income grew 38.8% from the year-ago quarter to $117 million. Non-GAAP net income attributable to ESLT’s shareholders and non-GAAP net EPS grew 17.4% and 17.9% year-over-year to $73.50 million and $1.65, respectively.
Analysts expect ESLT’s revenue and EPS to increase 8.1% and 5.8% year-over-year to $6.46 billion and $5.67, respectively, for the fiscal year ending December 2024.
ESLT’s shares have gained 29.4% over the past year to close its last trading session at $212.30. Over the past three months, the stock gained 5.1%.
ESLT’s sound outlook is reflected in its POWR Ratings. The stock has an overall B rating, which indicates Buy in our proprietary rating system.
It has an A grade for Stability and a B for Momentum and Sentiment. It is ranked #9 within the same industry.
In addition to the POWR Ratings highlighted above, one can access ESLT’s ratings for Growth, Value, and Quality here.
Stock #1: Textron Inc. (TXT)
TXT operates in the aircraft, defense, industrial, and finance businesses worldwide. It operates through six segments: Textron Aviation; Bell; Textron Systems; Industrial; Textron aviation; and Finance.
On December 19, 2023, Textron Aviation Inc., a subsidiary of TXT, and Civil Air Patrol (CAP) marked the delivery of four Cessna Skyhawk, one Cessna Skylane, and one Cessna Turbo Stationair HD aircraft in Independence, Kansas. These aircraft additions will contribute to CAP's existing fleet of nearly 550 Cessna aircraft.
On December 11, 2023, Textron Aviation unveiled the SustainableAdvantage℠ program under its new ProAdvantage initiative. The program, set to launch in January 2024, offers owners of Cessna, Beechcraft, and Hawker turbine aircraft a means to reduce carbon dioxide emissions from their operations. Developed in collaboration with 4AIR, the initiative provides eligible customers with environmentally friendly options.
The company pays an annual dividend of $0.08, which yields 0.10% on the current market price.
In the third quarter that ended September 30, 2023, TXT’s total revenues increased 8.6% year-over-year to $3.34 billion. Its adjusted income from continuing operations rose 20.7% over the prior-year quarter to $297 million. Its adjusted EPS from continuing operations came in at $1.49, representing an increase of 29.6% year-over-year.
TXT’s revenue is expected to increase 9.2% year-over-year to $3.94 billion for the fourth quarter ended December 2023. Its EPS is expected to grow 43.5% year-over-year to $1.54 for the same quarter. It surpassed EPS estimates in each of the four trailing quarters.
Shares of TXT have gained 19.9% over the past six months to close the last trading session at $80.43.
TXT’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to a Buy in our proprietary rating system.
It has a B grade for Value, Momentum and Quality. It ranks #6 in the same industry.
Click here to access additional TXT ratings (Growth, Stability and Sentiment).
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
GD shares were trading at $258.17 per share on Wednesday morning, down $0.43 (-0.17%). Year-to-date, GD has declined -0.58%, versus a -1.28% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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