Are defense stocks might or meh under Trump 2.0?
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Defense stocks are catching a bid after President Trump announced he is considering a record $1.5 trillion U.S. defense budget. This comes after he floated limits on sector buybacks and dividends, which weighed on stocks.
Why it matters: This exemplifies the guessing game that Wall Street plays regarding policies from the White House, which can fundamentally change the base case for investing in a sector.
What they're saying: "The sector without dividends and buybacks will certainly lose some of its traditional investors, but it will also attract a new investor who is focused on growth," Mark Malek, chief investment officer at Seibert Financial, said via email.
- Before Trump made his announcements, Malek flagged a bullish view on defense stocks in a note to clients, since he saw the moves in Venezuela as more optimistic for defense stocks than energy.
- "Focus on security, focus on defense, and let the others gamble on the resources," Malek wrote. He stands by that thesis in part because of the "Donroe Doctrine" and the national security focus of the administration.
Zoom out: But defense investors historically like the sector precisely because it offers them payouts through dividends and buybacks that support shares.
- The White House proposals could turn defense, traditionally a value sector, into a growth corner of the market.
Zoom in: The proposed spending surge would more than offset any drag from restrictions on payouts to shareholders, according to Morgan Stanley defense analyst Kristine Liwag.
- Among the major defense companies — Lockheed Martin, Northrop Grumman, General Dynamics, L3Harris and RTX — dividend yields averaged 1.9%, totaling about $8 billion over the last year.
- Buybacks ran at 1.8% of market cap, or about $10 billion combined.
- That means even a full clampdown on payouts would pale next to the hundreds of billions of dollars promised by Trump's budget target.
Reality check: This investment thesis works only if you believe this cash windfall is coming for defense companies. It's "not going to happen," Marko Papic of BCA Research said on a call with clients.
- That doesn't mean you shouldn't invest in defense stocks, he added, but Papic sees more opportunity in European defense stocks as nations like Germany have doubled down on investments.
The bottom line: This is a great example of the type of quick calculations investors must do under Trump: which policies will stick, which will fade, and which will actually show up in company earnings.
