Defense Stocks Could Fall Off Fiscal Cliff

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If you hold or intend to buy stocks in the defense sector, you are rightly concerned about the infamous fiscal cliff. No other industry stands to lose as much as the defense industry if President Obama and Congress fail to work out a plan to prevent the country from falling off the dreaded fiscal cliff.

I came across a report released this week that shed a few more details about how the industry will be affected. It details how if an agreement is reached, companies functioning in the space stand to see their overall sales increase.

According to the Aerospace Industries Association (AIA), overall sales for the U.S. aerospace and defense industry will increase by 3.4% to $218 billion. The growth will be fueled by strong civil aircraft sales, which will result in the industry’s ninth consecutive year of growth.

The AIA found that “the defense sector appears to be the most problematic in 2013 and beyond, particularly with respect to the domestic market.”

Most intriguing to me is the group’s findings related to how the fiscal cliff and sequestration are creating uncertainty for the military. The AIA noted that sequestration, in particular, would have a significant, negative impact on the military sector. That's because procurement programs would be slashed by an estimated 10.3%.

As I’m sure you are aware, projects for the military can run into the hundreds of millions of dollars. Any cuts to defense can affect companies like General Dynamics (NYSE: GD) and Northrop-Grumman (NYSE: NOC) that make high-price items like tanks and warships, as pointed out by Fool Writer Dan Carroll.

Then there are other companies like Boeing (NYSE: BA) and Lockheed-Martin (NYSE: LMT) that stand to be put in the position of having to make massive cuts to their work forces if there is not an agreement over the fiscal cliff. Carroll notes that Lockheed-Martin’s CFO has said sequestration will have only a minimal impact on one of his company’s major projects. However, Boeing has already started initiating job cuts, and more will come if an agreement is not reached.

There is one thing I can say about the sector’s attractiveness, despite fiscal cliff worries. I think they pay decent dividends. For example, I reviewed the dividends for the stocks in this story and found Boeing’s to be the lowest at 2.4%. General Dynamic’s is 3.1% and Northrop-Grumman’s is 3.3%.  Lockheed’s is the strongest of this bunch at 5%.

I remember when the dividends paid by defense companies were not the only reason they made for good investments. The other related to their revenue streams. Defense companies are highly reliant on U.S. government spending and what security could be better than that? The stalemate in Washington D.C. right now has seemingly made such thinking futile.

 

 


TwillyD has no positions in the stocks mentioned above. The Motley Fool owns shares of General Dynamics, Lockheed Martin, and Northrop Grumman. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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