In 2023, nearly half of America’s defense budget will end up in the pockets of military contractors.
In last week’s issue of The 101, we discussed how U.S. defense spending has now reached $877 billion … more than the next 10 countries combined.
Nearly half of that ends up in the pockets of military contractors, many of which are actively price gouging the Pentagon as the market for their instruments of war has dramatically consolidated.
While that’s probably insulting to the average American taxpayer, it’s more problematic for the 38,000 homeless veterans who rely on an underfunded VA for numerous resources.
But the unfortunate reality is that it’s unlikely to ever change. This level of spending is now ingrained in the U.S. federal budget.
We were warned about it by President Eisenhower in the early ’60s when the term “military-industrial-complex” was first used publicly.
And we were warned about it long before then, when two-time Medal of Honor recipient Major General Smedley Butler wrote “War Is a Racket” in 1935.
War Is a Racket
Of his 33-year career in the military, Butler said, “I spent 33 years in the Marines, most of my time being a high-class muscle man for big business, for Wall Street and the bankers.”
In Butler’s seminal piece, he observed that:
“War is a racket. It always has been. It is possibly the oldest, easily the most profitable, surely the most vicious … It is the only one in which the profits are reckoned in dollars and the losses in lives. A racket is best described, I believe, as something that is not what it seems to the majority of people. Only a small ‘inside’ group knows what it is about. It is conducted for the benefit of the very few, at the expense of the very many. Out of war a few people make huge fortunes.”
A racket is a fitting term considering the ludicrous profits just a handful of defense contractors have made in recent years.
And since the 12% of the federal budget allocated to the Pentagon is unlikely to change (if not increase annually), today we’re going to survey the top five military contractor stocks, as well as an exchange-traded fund (ETF) that provides exposure to the defense industry.
Note: One defense contractor’s stock is up 1,621% since 9/11.
Arm Your Portfolio
As we reported last week, from spare parts to Stinger missiles, the Department of Defense (DoD) is being bent over backwards when it comes to the prices it pays for everything required to support our military (and our allies’ militaries, for that matter).
It doesn’t matter if it’s a Meals-Ready-to-Eat (MREs) or tactical assault drones (a.k.a. kamikaze drones) being shipped off to Ukraine, the DoD is being price gouged from top to bottom.
And that price gouging is directly (and positively) impacting the bottom lines of certain defense contractors.
Here they are, in no particular order …
Stock performance of NOC (yellow), LMT (dark blue), GD (purple), RTX (orange) and BA (light blue) since 9/11.
No. 1: Lockheed Martin
Lockheed Martin (LMT) has four principal divisions:
- Aeronautics: $26.9 billion in 2022 sales.
- Missiles and Fire Control: $11.3 billion in 2022 sales.
- Rotary and Mission Systems: $16.1 billion in 2022 sales.
- Space: $11.5 billion in 2022 sales.
For those of you keeping count, that’s $65.8 billion in 2022 sales.
Shares of LMT are up 13% since Russia invaded Ukraine in February 2022 and over 43% in the past five years. The stock has risen a mind-boggling 1,621% since 9/11.
LMT pays a dividend yielding 2.6% quarterly, which equates to $3/share.
No. 2: Northrop Grumman
I’m sure plenty of you have heard of the B-2 Spirit, more commonly known as the Stealth Bomber. Well, that’s a Northrop Grumman (NOC) creation.
The company makes other war machines, too, ranging from submarine launch systems and hypersonic missiles to chain guns and night vision goggles.
Its stock is down 16% year to date, but it has produced a 559% return for investors over the past 10 years.
NOC pays a dividend yielding 1.65%, or $1.87/share quarterly.
No. 3: Boeing
Boeing (BA) makes plenty of money selling airlines its 737 commercial airplanes.
But it also makes a pretty penny from its military aircraft, including the Chinook helicopter, Osprey multi-role combat aircraft and the Apache combat helicopter, among others.
In 2022, the company had $66.6 billion in revenue to go along with an 89% increase in net profit margin over 2021.
Shares are up 52% over the past year and 123% since the pandemic began, when the stock dipped amid catering demand for commercial airplanes.
No. 4: General Dynamics
From $72.5 million Gulfstream private jets to Abrams tanks, General Dynamics (GD) is raking in business. And one of its latest products is something out of Black Mirror: the Land Systems’ TRX, a 10-ton robotic combat vehicle (RCV-M).
Despite only producing a 5.73% gain over the past five years, long-term investors have been rewarded for their patience with GD’s 2.74% dividend yield and a 201% return over the past 10 years.
No. 5: Raytheon Technologies
Like Lockheed Martin, Raytheon (RTX) has four business segments. It also has 67,500 employees in 46 countries and 30,000 patents in force or pending.
Its Missiles & Defense division is particularly lucrative, and offers weapons including the Peregrine missile — an air-to-air weapon used against drones, manned aircraft and cruise missiles — and the AMRAAM missile (pictured above), which costs over $1 million/unit.
RTX pays a 2.39% dividend yield, which has helped cushion its 2.2% year-to-date loss. However, since hitting its five-year low in April 2020, the stock has risen 97%.
An ETF for Good Measure
If you have a lower risk tolerance and prefer investing in ETFs — which offer broad industry or sector exposure while decreasing risk through diversification — look no further than the iShares U.S. Aerospace & Defense ETF (ITA), which holds all five of the aforementioned defense behemoths.
The ITA is up 9.14% over the past year and 11.73% over the past five. It has a modest expense ratio of 0.39%, which is offset by its dividend, which yields 1.04%, or $1.18/share.
TL;DR
The U.S. spends in inordinate amount of money financing its military, all while underfunding the veterans who fought to preserve our lifestyle. As much as we’d like that to change, it’s unlikely to. The aforementioned stocks and ETF are a good way for investors to take advantage of the inextricable relationship between defense contractors and the Pentagon.
Remember to always conduct your own due diligence before entering a trade.
Resources
- VettaFi’s ETF Screener: Screen over 2,000 ETFs by dozens of criteria.
- Veterans Affairs: Find resources, support and step-by-step instructions.
- Read: Major General Smedley Butler’s “War Is a Racket.”