For a time, it seemed as if The Boeing Company (NYSE:BA) was in big trouble. Its new commercial airline product, the 787 jetliner, was grounded, and the U.S. Government sequestration threatened to cut into its defense segment’s profits. But, those fears are yet to materialize into something terrible.
The result? A much higher stock price. The Boeing Company (NYSE:BA) shares hovered around $75 earlier this year on these fears. Now, the stock is up to $100 in a very short time.
787
The 787 has been cleared for flight again. That’s huge because of how much the 787 should drive growth for The Boeing Company (NYSE:BA) over the next couple of years. The Boeing Company (NYSE:BA) has received almost 900 orders for the 787, and airline execs didn’t really cancel any orders due to the battery problems that caused flights to be grounded.
The chart below shows the jump in revenue in 2012. This helps illustrate the importance of the 787 on The Boeing Company (NYSE:BA)’s future. Investing in The Boeing Company (NYSE:BA) can be risky since the 787 issues are still very new, but the airline companies have given the 787 glowing reviews.
Sequestration
The one issue that still needs to be addressed is just how much the sequestration will impact Boeing. What is even more important is how future defense spending will be handled by the government. Unfortunately, there is no good way to know what future congresses will do with the budget. However, we can feel relatively comfortable that defense spending isn’t going away altogether any time soon, given the continuing instability in certain key countries.
Competitors
If Boeing’s risk and big stock price rise has you scared, perhaps a defense company with a bigger dividend works for you: Lockheed Martin Corporation (NYSE:LMT). This company had been restrained for quite some time on the fear of government defense spending cuts. But lately, the stock has run much higher as these fears subside.
The fears over defense spending cuts are very real. However, much of those fears were already priced in the stock. Lockheed Martin Corporation (NYSE:LMT)’s management was well aware of the potential cuts and had already crafted a plan to cut costs if sequestration was to take place due to lack of congressional action on the budget.
When you have a company that’s as solid as Lockheed Martin Corporation (NYSE:LMT) and has shown revenue growth over the past few years, you should give them the benefit of the doubt that they will be able to manage their business through any temporary declines in revenue. In the end, you’re getting a strong company with a 12.4 P/E and a 4.30% dividend yield.
If you’re interested in the aerospace and defense industry, but want additional alternatives to Boeing and Lockheed Martin Corporation (NYSE:LMT), then look at these other three alternatives: Northrop Grumman Corporation (NYSE:NOC), General Dynamics Corporation (NYSE:GD), and Raytheon Company (NYSE:RTN).
Northrop Grumman Corporation (NYSE:NOC) makes a lot of different products for the defense industry, including, but not limited to:
- Manned and unmanned aircraft
- Spacecraft
- High-energy laser systems
- Electronic defense systems
Unfortunately, Northrop Grumman has struggled to grow recently and its stock price reflects this. Also, while the 2.90% dividend yield is nice, they haven’t been able to grow the payout much. Its P/E is only 10.6, so it might be a decent value play, but I’d rather go with Boeing, which has a growth driver in the 787, or Lockheed Martin Corporation (NYSE:LMT), which has a larger and growing dividend yield.
General Dynamics Corporation (NYSE:GD) focuses on aviation, combat vehicles, weapons systems & munitions. Unfortunately, I have the same feeling about General Dynamics as I have about Northrop Grumman: no top-line growth, little-to-no stock price appreciation over the past couple of years, and a nice dividend yield, but one whose payout hasn’t grown much over the recent years. It’s too risky for me in an environment of potential spending cuts. Again, I’ll take Boeing or Lockheed Martin Corporation (NYSE:LMT) over General Dynamics.
Raytheon Company (NYSE:RTN) makes missile defense systems, radar solutions, and naval combat systems. Its stock offers a nice 3.30% dividend, but its revenue has tailed off in the past year. However, prior to this past year, Raytheon had solid revenue growth and a rising dividend payout. With solid operating cash flows, it has plenty of earnings to pay its dividend and doesn’t seem like it would have much difficultly adapting to government spending cuts. I like it as an alternative to Boeing and Lockheed Martin. I like those two stocks better, but Raytheon looks like another decent play at an 11.7 P/E.
Bottom line
Investing in aerospace and defense companies still carries plenty of risk. Whether it’s a broad risk of government defense spending cuts, or specific company risk such as the newly approved 787 Dreamliner, you have to be able to stomach some ups and downs to invest in these companies. But, if these risks pass with time like I think they will, then this is a great time to buy these companies at cheap valuations.
They all give you great dividends to wait. My favorites are Boeing and Lockheed Martin. Boeing has had a big run, so I’d prefer to wait for a pullback on that one. Lockheed Martin is my preference right now with its big dividend.
The article Boeing Continues to Soar Higher originally appeared on Fool.com.
Dave Zaegel owns shares of Lockheed Martin. The Motley Fool owns shares of General Dynamics, Lockheed Martin, Northrop Grumman, and Raytheon Company. Dave is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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