Defense and aerospace companies can be undervalued long-term investments. A handful of power players dominate the sector and enjoy competitive advantages thanks to their constant innovation, deep pockets and strong ties to the US government and its allies.
They also benefit from the fact that America faces numerous (and varied) threats. Right now, there are wars and smaller conflicts taking place in Europe and the Middle East. Meanwhile, emerging national economies (such as those in the BRICS) have put economic pressure on Western countries like the United States, which have long had tense relations with some Eastern powers.
The unfortunate reality is that America’s strength protects America, but it also creates global tensions, meaning defense spending will likely be a priority for the US government for the foreseeable future:
General dynamics (NYSE:GD), Lockheed Martin (NYSE:LMT)And RTX (NYSE: RTX) are three of the six largest defense and aerospace companies in the world. Their products and services span land, sea, air and space, and they are poised to grow as key partners in America’s defense efforts for decades to come.
The best part? You can own shares in all three for less than $900.
Here’s what you need to know about these three buy-and-hold defense stocks.
1. General dynamics (trading around $300 per share)
It’s understandable that defense companies rely primarily on government spending for revenue, but General Dynamics offers more diversification than most other companies. The aerospace unit builds private jets and provides aviation services to corporations and wealthy clients. The company’s maritime division is the leading designer and builder of nuclear-powered submarines. Finally, the combat and technology segments build land vehicles, weapons systems, and software used for IT and mission control.
Politics can create volatility, especially when politicians debate the U.S. defense budget. The budget does not always increase and stagnates for periods at a time. This could have consequences for companies such as General Dynamics. Still, revenues and earnings have historically risen higher if you’re patient enough.
That seems ready to continue. Analysts believe that General Dynamics will grow earnings by an average of 12% per year over the long term. This means investors can earn double-digit returns when you take into account the company’s 1.9% dividend yield. Those looking for investment exposure to a little bit of everything should take a close look at General Dynamics.
2. Lockheed Martin (trading around $472 per share)
Investors may have seen the F-35 in the news because of its potential $2 trillion program cost. It’s probably fair to say that this is Lockheed Martin’s most famous product. However, the defense giant builds many products within its business units, including jets and helicopters, naval ships, satellites and spacecraft, missile systems and cybersecurity products. The company’s aerospace segment represents nearly a fifth of revenue, making the stock an excellent choice for long-term exposure.
Although controversial, the F-35 program has become a cornerstone for U.S. defense, with a potential duration until 2088. It sets a high bar for Lockheed Martin’s operations, which should give investors confidence that it will continue for decades to come will continue to grow.
Despite the presence of the F-35, analysts are more cautious about Lockheed Martin’s growth. According to analyst estimates, annualized growth of 4% is expected over the next three to five years. That means investors can earn returns in the high single digits when they consider the stock’s 2.7% yield. Looking further, it’s hard not to like Lockheed Martin’s aerospace unit as a potential growth catalyst going forward. Investors can think of Lockheed Martin as a high-floor, lower-ceiling investment.
3. RTX (trading around $102 per share)
A 2020 merger between Raytheon Technologies and United Technologies formed RTX, the world’s largest defense company with annual revenues of $71 billion. RTX has a huge footprint in the aviation sector. The Collins Aerospace unit sells aircraft, components and systems to military and commercial customers. At the same time, Pratt & Whitney is a separate entity and leading manufacturer of aircraft engines and auxiliary power units. The Raytheon segment houses the military offering, including weapons, systems and components for air, land, sea and space.
The merger involved accounting adjustments and spin-offs that impacted GAAP earnings. However, sales are at a record high and analysts expect profits to rise again this year with earnings per share of about $5.39. Long-term earnings growth estimates are at 11% annualized, so the future looks bright for RTX and its shareholders.
Like General Dynamics, RTX offers investors additional diversification into commercial operations. Pratt & Whitney’s leadership in critical aircraft components is a competitive advantage that should help the company achieve consistent performance over time.
Should You Invest $1,000 in General Dynamics Now?
Consider the following before buying shares in General Dynamics:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and General Dynamics wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $723,729!*
Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns from June 24, 2024
Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin and RTX. The Motley Fool has a disclosure policy.
3 Defense Stocks to Buy With $875 and Hold Forever was originally published by The Motley Fool
