Trump Attacks Defense Stocks
President Trump is back to making big news in the stock market.
Last week, Trump announced U.S. defense companies will need to stop paying dividends and buying back stock unless they address some of his complaints.
Here is more detail about Trump’s comments.
Trump is proposing a huge change.
Historically, the U.S. government let companies run themselves and wouldn’t interfere.
But the Trump administration is changing the policy.
Generally, I’m not a fan of the government telling companies what to do.
But I actually think Trump is onto something here, especially regarding buybacks.
I’m not a huge fan of stock buybacks.
It keeps stock prices higher, which is a good thing.
But it doesn’t create any value.
I’d much rather a company reinvest the money into new products to grow the business rather than artificially keeping their stock prices higher.
And Trump agrees, especially for defense companies.
Trump is upset these companies are buying back shares rather than investing and building new products.
Defense stocks fell on the news, which makes sense.
People owning defense stocks for their dividends are going to be selling.
And if you’re a dividend investor, now is a smart time to sell your defense stocks.
But if you don’t care about the dividends, now is a great time to buy up some defense companies.
Defense companies’ biggest customer is the U.S. government, so when your biggest customer is saying “build new products,” you better listen.
Trump isn’t messing around either.
He recently proposed increasing the military budget by more than 50% to $1.5 trillion by 2027.
And these defense stocks are going to cash in.
General Dynamics (ticker: GD) is one of America’s largest defense companies.
Over the last year, General Dynamics made over $4 billion in income.
And it’s the 3rd largest U.S. government contractor (behind other defense companies, Lockheed Martin (ticker: LMT) and RTX Corp (ticker: RTX)).
What makes General Dynamics so special?
General Dynamics’ Return on Equity (ROE) of 18.3% is one of the highest in the Aerospace and Defense industry.
And General Dynamics’ 23x price-to-earnings ratio is almost half of the industry average.
Plus, over 80% of General Dynamics’ revenue comes from the U.S.
So if the military budget increases by 50%, General Dynamics is in the perfect spot to benefit.
Transdigm Group (ticker: TDG) isn’t as large as General Dynamics, but it shouldn’t be overlooked.
Transdigm sells and services parts for aircraft, with about 40% of its revenue coming from the military.
What makes Transdigm really interesting is its margins.
Transdigm’s profit margin of 23.5% is one of the highest among defense contractors and is 5x higher than its peers.
Transdigm is able to have high margins because it’s one of the only manufacturers of the parts our military needs for its aircraft.
The only negative is its high 43x price-to-earnings ratio.
But I’m willing to pay more for a company averaging double-digit revenue growth over the last decade.
Last up is Northrop Grumman (ticker: NOC), a large defense contractor with the added benefit of a space division.
Northrop Grumman made just over $4 billion in the last 12 months, so it’s a similar size to General Dynamics.
But Northrop Grumman generates almost 30% of its revenue from the fast-growing space industry.
And Northrop Grumman is one of the leading suppliers of drones to the U.S. military.
Its profit margin of 9.8% isn’t as high as Transdigm’s, but Northrop Grumman’s price-to-earnings ratio of 22x means the stock is a lot cheaper.
What defense companies do you own?
Coach Parker
Category: Stocks
