The Best Defensive Stocks to Own This Month The rising geopolitical instability worldwide is creating favorable prospects for the U.S. defense industry. Moreover, increased government defense spending will likely boost the sector this year. Hence, I think fundamentally...
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The rising geopolitical instability worldwide is creating favorable prospects for the U.S. defense industry. Moreover, increased government defense spending will likely boost the sector this year. Hence, I think fundamentally strong defense stocks Textron (TXT) and Leidos Holdings (LDOS) might be solid buys. Keep reading.
Amid the ongoing war in Ukraine and other global security concerns, countries are enhancing their military capabilities and investing in defense technologies. As a result, the US defense industry has become a safe harbor during market uncertainties.
Therefore, I think investors could invest in quality stocks Textron Inc. (TXT) and Leidos Holdings, Inc. (LDOS), which pay stable dividends.
The United States Aerospace and defense sector is one of the largest in terms of infrastructure and manufacturing activities. The increasing geopolitical tensions with China and Russia have led to the US government increasing its defense spending, which is expected to boost research and development (R&D) and manufacturing within the defense industry.
As a result, the United States Aerospace and Defense Market is projected to grow at a CAGR of 2.4% during 2023-2028.
Moreover, the 2023 National Defense Authorization Act, with its $858 billion defense spending, provides a significant opportunity for the US defense industry. The Act includes provisions for investments in technology, quantum computing, and artificial intelligence programs.
In addition, the Act's authorization of $1 billion for the National Defense Stockpile presents another opportunity for the defense industry to acquire strategic materials.
Furthermore, the defense industrial base in the US and Europe are preparing to ramp up production rates to meet the increasing demand for munitions, missiles, and weapons due to their rapid usage in Ukraine and growing international orders. This is driving the global defense spending to reach a projected record of $2.5 trillion by 2027.
Let's dive deep into the stocks mentioned above:
Textron Inc. (TXT)
TXT engages in the aerospace, defense, and manufacturing businesses. Its segments include Textron Aviation; Bell; Textron Systems; Industrial; and Finance. The company builds and sells commercial jets, military trainers, and defense aircraft. It also offers finance for new and pre-owned aircraft and bell helicopters.
On February 21, 2023, TXT's Bell Textron Inc announced that the Bell 505 completed its first flight fueled solely by 100% Sustainable Aviation Fuel (SAF), marking the first-ever single-engine helicopter to fly with 100% SAF.
On April 26, TXT declared a quarterly dividend of $0.02 per share on the company's common stock, payable to its shareholders on July 1, 2023. Its annual dividend of $0.08 yields 0.12% at the current market price. It has a four-year average dividend yield of 0.16%.
TXT's total revenue increased 9.5% year-over-year to $3.02 billion for the fiscal first quarter that ended April 1, 2022. Its Aviation segment's revenue rose 10.5% from the previous-year quarter to $1.15 billion and its Industrial segment's revenue grew 11.2% year-over-year to $932 million.
In addition, the company's adjusted net income grew 2.8% from the year-ago quarter to $218 million, while its adjusted EPS increased 8.2% year-over-year to $1.05.
The consensus EPS estimate of $1.21 for the fiscal second quarter (ending June 2023) represents a 20.8% increase year-over-year. The consensus revenue estimate of $3.42 billion for the current quarter indicates an 8.4% increase from the same quarter last year. The company has an impressive earnings surprise history, surpassing the consensus EPS estimates in three of four trailing quarters.
Over the past nine months, the stock has gained 1.7% to close the last trading session at $66.65.
TXT's POWR Ratings reflect this promising outlook. The stock has an overall rating of A, which equates to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It also has a B grade for Value and Quality. Within the 70-stock Air/Defense Services industry, TXT is ranked #8.
Click here to see the additional POWR Ratings for TXT (Growth, Stability, Sentiment, and Momentum).
Leidos Holdings, Inc. (LDOS)
LDOS and its subsidiaries provide services and solutions in the defense, intelligence, civil, and health markets in the United States and internationally. It operates through three segments: Defense Solutions; Civil; and Health.
On April 18, LDOS and its Dynetics team announced their intention to compete in another moon race through a promotional partnership with NASCAR, a company known for high speeds.
LDOS' CEO Roger Krone said, "This groundbreaking collaboration between Leidos and NASCAR takes both companies into uncharted territory, just like we believe our rover will do for NASA and its astronauts."
On April 28, LDOS declared a quarterly cash dividend of $0.36 per outstanding share of common stock, payable on June 30, 2023.
The company pays an annual dividend of $1.44, which translates to a yield of 1.78% at the current price level. It has a four-year average dividend yield of 1.45%. Its dividend payments have grown at a CAGR of 2.4% over the past three years.
LDOS' revenues increased 5.9% year-over-year to $3.70 billion for the fiscal first quarter ended March 31, 2023. Moreover, its non-GAAP net income amounted to $205 million or $1.47 per share and adjusted EBITDA stood at $346 million.
The company witnessed growth in all of its segments. Its Defense Solutions segment revenues rose 3% from the previous-year quarter to $2.11 billion and the Civil segment revenues of $877 million increased by 10% year-over-year. Also, Health segment revenues rose 9% year-over-year to $710 million.
Analysts expect LDOS' revenue to rise 3.5% year-over-year to $3.72 billion in the fiscal second quarter ending June 2023. The company's EPS is expected to increase 1.4% year-over-year to $1.61 in the same quarter. It surpassed revenue estimates in each of the trailing four quarters, which is remarkable.
The stock gained marginally intraday to close the last trading session at $80.89.
It is no surprise that LDOS has an overall B rating, which equates to a Buy in our proprietary rating system.
Also, the stock has a B grade for Value. Within the Technology – Services industry, it is ranked #20 out of 79 stocks.
To access additional POWR Ratings for Growth, Momentum, Stability, Sentiment, and Quality for LDOS, click here.
What To Do Next?
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TXT shares were trading at $64.89 per share on Thursday morning, down $1.76 (-2.64%). Year-to-date, TXT has declined -8.32%, versus a 6.32% 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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