Dear Mr. Berko: President Donald Trump will spend $639 billion on defense this fiscal year. In fact, he recently announced a $54 billion increase in defense spending, which is up $6 billion from 2016. The president announced that he's committed to rebuilding our military, committed to improving our cybersecurity ability and committed to increasing our arsenal of planes and ships. What major defense stocks would you recommend to profit from this increased spending? — JK, Kankakee, Ill.
Dear JK: The following are some of the better picks among the major defense stocks. These three will receive the lion's share of military spending over the coming four or eight years that Trump will be in office. Many on Wall Street will tell you that defense stocks have already risen in expectation of increased military spending and that current prices are too high to justify a purchase. They're about 35 percent right.
Lockheed Martin (LMT-$268) — builder of the F-104, the F-16, the F-22, the C-130, the P-3 and others — will be among the prime beneficiaries of increased military spending. The company's flagship program is its F-35 stealth fighter, the world's most advanced combat aircraft. LMT intends to build over 2,400 of these technologically advanced jets for the Air Force and Navy. Partner nations Japan, Canada, the United Kingdom and even Israel and Saudi Arabia are also scheduled to receive these highly advanced aircraft. The F-35 program, which represents 26 percent of LMT's total revenues, is expected to fuel growth and earnings for at least the next decade. There are over 97,000 people who work for LMT, and they'll put $50 billion in revenues on the books in 2017 plus record earnings of over $12.50 a share. Meanwhile, the $7.45 dividend, yielding 2.8 percent, may be raised to $8.35 next year.
Raytheon (RTN-$151) deploys technologies (some of which are quite sexy) that continually monitor the world's information environment. RTN interfaces its cybersecurity technologies as a $25 billion provider of ground-based air defense systems, ground-based air intercept systems, airborne and ground-based radar systems, and sophisticated communications systems. The Pentagon recently allotted $19 billion for software and services to protect U.S. computer networks against hackers. So RTN's Forcepoint cybersecurity imprint and diverse defense services solutions will continue to improve revenues and earnings. An increasing backlog (now $28 billion) and its 63,000 employees should continue to improve revenues, earnings and the superb dividend, which yields 1.9 percent.
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President Trump and General Dynamics (GD-$187) will expand the number of U.S. naval vessels from 275 to 355, which is the number China expects to have in the next three years. General Dynamics' Electric Boat division has been the primary builder of boats and submarines for over 100 years. Its $18 billion contract with the Navy for 10 Block IV Virginia-class attack subs is the largest in history. GD also has a $3.4 billion contract for its Arleigh Burke destroyers, the most advanced air and missile defense ships in the world. GD, with $32 billion in revenues and a $60 billion backlog, is the largest shipbuilder in the U.S. and supported by 99,000 employees. The dividend, yielding 1.8 percent, has increased every year since 1996.
Because there will always be economic, social and political turmoil in the world, intentionally inspired by nations (the U.S. included), defense spending will be a major portion of our gross domestic product. The three companies above employ 259,000 people and support millions of others who are employed by smaller contractors. The subcontractors produce billions of dollars' worth of important parts for these companies plus Rockwell Automation, Northrop Grumman, Boeing, B/E Aerospace, Elbit Systems, L3 Technologies and others. It's estimated that our defense spending directly employs 3.1 million people (civilian and military) when it comes to making weapons and 3 million indirectly, such as those working in local businesses supported by a contractor's location in town. That's 6.1 million people! Holy gosh, just imagine the economic catastrophe we'd have if peace were to break out all over!
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at email@example.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.