Defense stocks are broadly appealing for dividend growth investors. Geopolitical strife is a constant, meaning rising defense budgets in the U.S. and around the world. This provides the top defense companies with steady cash flow and dividend growth for shareholders. 

This article will discuss 3 defense stocks for long-term dividend growth investors. 

Lockheed Martin (LMT)

Lockheed Martin is the world’s largest defense company. It derives roughly 60% of its revenue from the U.S. Department of Defense. Aeronautics is the biggest segment at 40% of sales which produces military aircraft like the F-35, F-22, F-16 and C-130. The Rotary and Mission Systems manufactures combat ships, naval electronics, and helicopters. The company also operates a Missiles and Fire Control business and a Space Systems segment. 

In the most recent quarter, revenue declined 9% as sales fell across its businesses. For 2022, Lockheed Martin expects annual revenue of $65.25 billion and EPS of $21.55. The company should return to long-term growth as it has a backlog of nearly $135 billion. 

Lockheed Martin is an entrenched military prime contractor. It produces aircraft and other platforms that serve as the backbone for the US military and other militaries around the world. This leads to a competitive advantage as any new technologies would have to significantly outperform extant platforms. 

The company has increased its dividend for 20 consecutive years. The stock currently yields nearly 3%.

L3Harris Technologies (LHX)

L3Harris Technologies is the result of a merger between L3 Technologies and Harris Corporation completed in 2019, forming the sixth largest defense contractor. The company now reports three business segments: Integrated Mission Systems (~42% of revenue), Communication Systems (~23% of revenue), and Space and Airborne Systems (~35% of revenue). The majority of the L3Harris’ sales are to the US Government or to other defense contractors. The company had revenue of about $17.8B in 2021. 

L3Harris reported Q2 2022 results on July 28th, 2022. Companywide revenue fell 6% and diluted non-GAAP EPS decreased 2% to $3.23 from $3.28 on year-over-year basis. Integrated Mission Systems segment revenue fell 6% due to declines in ISR, Electro Optical, and Maritime, offset by increases in Commercial Aviation. Revenue for Space & Airborne Systems decreased 1%. The funded book-to-bill ratio was 1.14. The company won $700M for the National Defense Space Architecture Tracking Layer, $250M for the F-35, $250M for the Vulcan Centaur Rocket, $300M for NATO tactical radios, and other awards. The company guided for $17.3B - $17.7B in revenue and $13.35 - $13.65 for EPS in 2022.

the new company is positioned for both top and bottom-line growth in high margin market segments. Increased defense spending will support top line growth. Both predecessor organizations have a history of increasing earnings and dividends. We are currently forecasting average annual earnings per share growth of 8% out to 2027.

The company develops and manufactures complex and bespoke systems for the DoD requiring a skilled work force with security clearances that is not easily replicated. Notably, L3Harris is the market leader in tactical communications. Furthermore, L3Harris has built long-term relationships with both the DoD and prime contractors in its areas of expertise. These attributes make it somewhat recession resistant.

Huntington Ingalls (HII)

Huntington Ingalls was spun out of Northrop Grumman (NOC) in a tax-free transaction in 2011. Today, the company primarily builds nuclear and non-nuclear ships for the U.S. Navy. The company reports three business segments: Newport News Shipbuilding, Ingalls Shipbuilding, and Mission Technologies. Newport News builds nuclear powered aircraft carriers and submarines. Ingalls builds surface combatant ships, amphibious assault ships, and Coast Guard cutters. Mission Technologies provides fleet maintenance and modernization, IT support, nuclear management and operations, and unmanned systems. The company had approximately $9.5B in revenue in 2021. 

Huntington Ingalls reported Q2 2022 results on August 4th, 2022. Companywide revenue rose 19.3% to $2,662M compared to $2,231M and diluted earnings per share grew 38.8% to $4.44 from $3.20 on a year-over-year basis. Companywide operating margins increased 88 bps to 8.5% from 7.6%. Revenue from Ingalls Shipbuilding decreased 1.8% driven by lower revenue in surface combatant ships offset by assault ships. Newport News revenue rose 5.1% due to higher aircraft carrier volumes offset by nuclear support services and flattish submarine volumes. Revenue for Mission Technologies increased 153% to as a result of the Alion acquisition. 

Huntington Ingalls guided for ship building revenue of $8.2B - $8.5B and margins of 8.0% to 8.1%. The company guided higher for Mission Technologies revenue of ~$2.6B and margins of ~2.5% Huntington Ingalls’ total backlog now stands at $47.2B after about $2.0B in contract wins of which $24.6B is funded.

We expect the company to grow earnings-per-share by 5% over the next five years. The Pentagon is spending heavily on aircraft carriers, nuclear submarines, and amphibious assault ships. The U.S. Navy has a goal of 355 ships by 2034. Huntington Ingalls should experience top and bottom line growth due to sale of ships and submarines. The share count should trend lower as well. 

Huntington Ingalls has paid a growing dividend at a double-digit rate albeit off a low base since 2012. The forward payout ratio is about 34%, which leaves room for future increases. Shares currently yield 2.1%.