An investment analyst at the U.S.’ biggest and world’s fifth largest bank endorsed the defense sector this week in a note to investors with a forecast that views continued “green” movement in stock prices.
Seth Seifman of JPMorgan predicted the average defense stock could rise by at least 10 percent over the next 16 months and said investors should look to these companies for steady returns to shareholders and visibility into their cash flows.
“Big Five” defense primes General Dynamics, Lockheed Martin and Northrop Grumman in particular have been among the more aggressive companies of recent times in terms of stock buybacks and dividend payments to shareholders.
General Dynamics has cut its outstanding shares by nearly 14 percent since Phebe Novakovic took the helm as CEO in January 2012, Lockheed has taken its share count down by almost 6 percent during Marillyn Hewson’s three-and-a-half years as chief executive so far, and Northrop has bought back roughly a third of its stock under Wes Bush’s leadership over six-and-a-half years.
Each of those three has either consistently maintained or increased quarterly dividends year-over-year under their current CEOs, while General Dynamics will use its full free cash flow from 2015 for stock repurchases and dividend payments in 2016.
When including other Big Five members Boeing and Raytheon, the average defense prime stock price has roughly doubled over five years with General Dynamics up nearly 180 percent as both Lockheed and Northrop shares have tripled over that time span.
Lockheed’s stock has taken an almost 8-percent hit since the contractor spun off and merged its former services business into Leidos Aug. 16 on potential earnings dilution after share repurchases related to the transaction fell short of guidance given to investors.
But as Lockheed Chief Financial Officer Bruce Tanner noted in July, one factor “working against” the F-35 maker in the repurchase effort was that stock’s extended rise by almost 22 percent over six months after the initial Jan. 26 announcement of the deal with Leidos.
Essentially, Lockheed’s stock got more expensive to buy between January and July for everybody including the company itself even with the $1.8 billion dividend Leidos paid to Lockheed that contributed to the repurchase initiative.
Time will tell if the other shareholder-focused contractors face the same issues in buybacks of their own stock and whether investors will decide to stay in for the long game as many analysts forecast continued growth in military spending over the next decade, or look to take their profits soon.
THE WEEK’S OTHER TOP 10 GOVCON STORIES