So long as there is no peace on earth, defense stocks look good

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Dear Mr. Berko:

I would like to invest $14,000 in a defense stock. My broker recommended Lockheed Martin. But I know Raytheon and Northrop Grumman, recommended by another broker, are also defense stocks. How do I make a decision on which stock to pick? I would appreciate your recommendation on the best of the three.

GS, Aurora, Ill.

Dear GS:

Frankly, it doesn't make a tinker's dam worth of difference which one you choose. In the very profitable business of killing people, these companies are the very best and most skillful. With the exception of corporate warts, freckles and imaginative accounting, these three are mirror images of one another.

Some observers claim, however, that Lockheed-Martin (LMT-$77.10) may be closer to the congressional ear because the LMT wallet owns the most powerful lobby group in Washington. So in this instance, your broker's recommendation may be all wool and a yard wide.

In the past decade, LMT's revenues have doubled to $46 billion, and net income has tripled to $7.43 a share. LMT's dividend has increased every year since 2001, from 44 cents to $4 (current yield: 5.2 percent), and it may be increased in 2012 to $4.40. Not bad for a company that makes fighter planes, troop transports, missiles, guidance systems and other military technology and has $4 billion in cash and 133,000 employees. The Street believes that in the coming four years, LMT could trade at $135.

Northrop Grumman's (NOC-$57) airborne systems, electronic warfare devices, fighter planes and weapons systems produced $27 billion in revenues, a $2 billion net profit ($6.90 a share) and a $2 dividend yielding 3.6 percent in 2011.

NOC's revenues have doubled in the past decade; the dividend grew 250 percent and may be increased to $2.24 this year. The Street expects 2012 revenues to top $28.5 billion, earnings to exceed $7.25 a share and book value to jump from $45 to $51 a share. And at 7.5 times earning, some think NOC may be preferable to LMT, which trades at 10.5 times earning. The Street price talk for this 137,000-employee company is in the high $90s in the next few years.

Raytheon's (RTN-$44.41) 75,000 employees generated $26 billion in revenues from the design, sale and manufacture of defense electronics, ground-to-air missile systems, air intercept missiles, radar systems and other military products. In the past 10 years, revenues grew 75 percent, earnings grew four-fold, and the dividend more than doubled to $1.72, providing investors with a 4 percent yield. Trading at a 7.6 price-earnings ratio and with expected 2012 revenues of $27.5 billion, improved earnings from $5 to $5.55 in 2012 and a continually growing dividend, RTN could trade in the middle to high $80s by 2014, so the Street's thinking goes.

Each of these issues may have good appreciation potential. So I suggest dividing that $14,000 equally among the three. Because each has a captive client (about 85 percent to 90 percent of their revenues derive from the federal government), I must remind you of the highly speculative nature of these companies. If peace were to break out, the economic results could be calamitous. Neither LMT, RTN nor NOC would be able to convert its work force quickly enough to the business of rebuilding dams, roads, bridges, and sewers, so more than 330,000 workers would be immediately out of work. And because the peripheral suppliers to the defense industry lack the organization to engage their work force to build new grade schools, high schools, colleges and hospitals, several million more Americans would be out of work.

I don't believe the current American mood would tolerate that significant of an increase in the unemployment numbers. So say a special prayer in the Amen Corner of your church that peace on earth will never come. Can you imagine the economic and social disaster that would ensue?

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2011 Creators Syndicate Inc.

Published: Mon, Dec 12, 2011