Despite any outcome from the Congressional Super Committee regarding defense spending cuts, Fitch Ratings expects US defense contractors (NYSE:PPA) to face increasingly difficult decisions over cash deployment priorities in the coming years. The firms cites moderate revenue growth and slowing free cash flows.
The rating agency explains, “While prospects are poor for a broader budget deal in the near term, Congress could still agree on legislation to curtail automatic cuts, which could trigger as much as $1 trillion in DOD spending reduction off of baseline levels over the next decade. The Fitch base case assumes that $700 billion in spending reductions would occur, the approximate midpoint between the worst- and best-case scenarios. Still, regardless of the spending scenario chosen, spending reductions will translate into slower revenue and profitability growth, forcing defense firms to consider more aggressive cash deployment strategies to boost equity returns.”
Will cash deployment problems cause a dividend reduction in some stocks? Here’s a look at popular defense names that pay a dividend:
Raytheon Co. (NYSE:RTN): Operates in defense, homeland security and other government markets. The company provides electronics, mission systems integration in the areas of sensing, effects, command, control, communications and intelligence systems, and mission support services. Raytheon provides products and services worldwide. Shares are down 2% year-to-date, and currently pays a dividend of almost 4%.
Lockheed Martin Corporation (NYSE:LMT): A global security company that primarily researches, designs, develops, manufactures, and integrates advanced technology products and services. The company’s businesses span space, telecommunications, electronics, information and services, aeronautics, energy, and systems integration. Shares have increased 13% this year, and pay a 5.2% dividend.
Northrop Grumman Corporation (NYSE:NOC): Operates as a global security company. The firm provides systems, products, and solutions in aerospace, electronics, information systems, shipbuilding and technical services to government and commercial customers worldwide. Shares have decreased almost 12% year-to-date, and pays a dividend that yields 3.6%.
Boeing Co. (NYSE:BA): Together with its subsidiaries, develops, produces, and markets commercial jet aircraft, as well as provides related support services to the commercial airline industry worldwide. The company also researches, develops, produces, modifies, and supports information, space, and defense systems, including military aircraft, helicopters and space and missile systems. Shares have gained 8% this year, and pay a 2.6% dividend.
General Dynamics Corp. (NYSE:GD): A diversified defense corporation. The company offers a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; shipbuilding design and construction; and information systems, technologies and services. At the end of the third quarter, Warren Buffett (NYSE:BRKA) revealed a new 3.1 million share position in the company. Shares have fallen 6% this year, and pay a 2.9% dividend.
Textron Inc. (NYSE:TXT): A global, multi-industry company with operations in aircraft, defense, industrial products, and finance. The company’s products include airplanes, helicopters, weapons, and automotive products. Textron’s finance division offers asset based lending, aviation, distribution, golf, and resort finance, as well as structured capital. Shares are down almost 18% year-to-date, and pays a .40% dividend.