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Defense and Aerospace Opportunities for Dividend-Seekers

Chris Higgins, CFA

Chris Higgins: The large-cap aerospace and defense names we cover have been consistent dividend-payers over the past decade, and we think this past history will continue over the next several years as the commercial aerospace cycle goes on strong and U.S. defense budgets increase.

Investors hungry for high dividend yields piled into defense stocks from 2010 to 2013. However, increasing share prices across the defense industry pushed yields down, and this trend was particularly pronounced in 2017 and 2018. The recent underperformance for defense names has meant dividend yields look a bit more attractive now, and while we don’t think we’ll return to the days when yields were pushing 4%, we do believe some names offer secure dividends, decent yields, and the potential for some growth.

Across our defense coverage space, Lockheed, Raytheon, General Dynamics, and Northrop Grumman all pay dividends, and they are all planning to increase their 2019 dividends relative to 2018. Lockheed and General Dynamics are currently offering the highest dividend yields in our coverage universe for defense. And we’d note that General Dynamics is a dividend aristocrat, having increased its dividend every year for more than 25 years. Lockheed has hiked its dividend for 17 years straight. We do think General Dynamics has a bit more breathing room with its dividend due to Lockheed’s relatively high payout ratio.

Turning to the commercial aerospace sector, Boeing is top of mind for many investors following the MAX groundings and the potential financial impact this could have on Boeing. Even with the recent pullback in Boeing’s share price, the stock is only offering a yield that hovers around the S&P 500’s. That said, we think Boeing should continue to generate prodigious amounts of cash flow over the next several years, and we believe that the dividend should grow at a double-digit rate on average over the next four years even after having increased 23% per year on average over the past four years. Unless an aviation regulator discovers a critical design flaw on the 737 MAX (something that we think is possible but very unlikely), Boeing’s dividend growth story is secure in our view.