The Congressional “super committee”, tasked by August’s debt ceiling deal to agree on budget cuts and/or tax hikes by Thanksgiving, has some tough choices to make — fast. If the 12-member committee fails to forge a compromise by Nov. 23, it would trigger $1.2 trillion in automatic, across-the-board spending cuts.
The Pentagon already is working to identify about $450 billion in cuts over the next decade. But Defense Secretary Leon Panetta told reporters on Thursday if the deficit panel fails to reach an agreement, the trigger would “virtually double the size of the cuts we face,” forcing the Pentagon to cut each department by more than 20%.
While it’s relatively easy to gain small cost efficiencies, you need to find big chunks of cash to make a serious dent in the defense budget. One obvious target for budget-cutters is Lockheed Martin’s (NYSE:LMT) delay-plagued F-35 Joint Strike Fighter, expected to cost $400 billion over the next 20 years. At the very least, Defense Department will reduce the number of jets from the original 2,400. The Virginia-class nuclear attack submarine, built by General Dynamics’ (NYSE:GD) Electric Boat division, is another likely target. The next-generation subs cost about $2.3 billion each.
If no one blinks in the Super Committee’s game of chicken, everyone loses. But if the six Republicans and six Democrats can manage to cut a deal, here are four defense stocks likely to hold their own and deliver sustainable dividends:
1. Raytheon (NYSE:RTN): If there are any winners in a leaner defense budget, this company’s battle-tested Patriot missile, advanced cybersecurity and immigration control/identity management products will be among them. At $45.47, RTN is trading more than 18% above its 52-week low of $38.35 in September. Its price-to-earnings growth ratio of 0.96 suggests the stock is valued about right. It has a current dividend yield of nearly 3.7%.
2. L-3 Communications (NYSE:LLL): L-3 does a lot of business providing logistics support, operations and maintenance to the U.S. Special Operations Command. At budget time, it never hurts to remind lawmakers you had the backs of the guys who got Osama Bin Laden. At $69.47, LLL is trading nearly 19% above its 52-week low of $58.30 in September. The stock has a PEG ratio of 1.1%, meaning it’s valued about right. LLL has a current dividend yield of 2.5%.
3. Boeing (NYSE:BA): Boeing’s defense unit has a backlog of nearly $60 billion right now. But despite the U.S. Navy’s award of a $1.7 billion contract for Poseidon surveillance planes this week, cuts likely will reduce the total procurement of the aircraft. However, on the commercial aircraft side of its business, Boeing’s 787 Dreamliner will benefit from this week’s news that the new Airbus A350 will be delayed until the first half of 2014. At $66.80, BA is trading about 19% above its 52-week low of $56.01 in August. The stock has a PEG ratio of 0.94, meaning it could be slightly undervalued. BA has a current dividend yield of 2.5%.
4. KBR (NYSE:KBR). As the U.S. exits Afghanistan, KBR’s base-support revenue will dwindle. Nevertheless, the company is seeing strong growth in its hydrocarbons business, which includes biofuels and liquefied natural gas. At $28.02, KBR is trading 20% above its 52-week low of $20.86 last month. The stock has a PEG ratio of 0.87, indicating it’s undervalued. KBR has a current dividend yield of 0.7%.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.