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What are we looking for?

Highly sustainable dividends from defence contractors poised to tap new military spending.

The screen

Japan and South Korea have raised their military spending in response to North Korea's provocative missile and nuclear-bomb tests. President Donald Trump also aims to boost U.S. defence spending to combat those threats – at the same time he's spurred Canada and other allies to boost their own budgets.

Which companies are likely to expand their earnings – and dividends – with a significant share of that new defence spending? Our search relied on an extensive list of dividend-paying Canadian and U.S. contractors with sound military divisions. We then singled out those ready-to-win new contracts as Western defence spending increases.

We then applied our TSI Dividend Sustainability Rating System. It awards points to a stock based on key factors:

  • One point for five years of continuous dividend payments – two points for more than five;
  • Two points if it has raised the payment in the past five years;
  • One point for management’s commitment to dividends;
  • One point for operating in non-cyclical industries;
  • One point for limited exposure to foreign currency rates and freedom from political interference;
  • Two points for a strong balance sheet, including manageable debt and adequate cash;
  • Two points for a long-term record of positive earnings and cash flow sufficient to cover dividend payments;
  • One point if the company is a leader in its industry.

Companies with 10 to 12 points have the most secure dividends, or the highest sustainability. Those with seven to nine points have above-average sustainability; average sustainability, four to six points; and below-average sustainability, one to three points.

More about TSI Network

TSI Network is the online home of The Successful Investor Inc. – Pat McKeough's widely followed group of Canadian investment newsletters. They include our award-winning flagship newsletter, The Successful Investor, which covers TSX index stocks. The TSI Dividend Advisor is the newest addition. TSI Network is also affiliated with Successful Investor Wealth Management.

What we found

Our TSI Dividend Sustainability Rating System generated six companies best placed to win new contracts: Montreal-based CAE Inc. produces military flight simulators, while Magellan Aerospace Corp., headquartered in Mississauga, makes military aircraft components. MacDonald Dettwiler and Associates Ltd. of Vancouver sells satellites and high-resolution imagery worldwide. Similarly, there is international demand for Boeing Co. military aircraft. Aerospace giant Lockheed Martin Corp. will now see its controversial THAAD (terminal high altitude area defence) missile system deployed in South Korea. Raytheon Co., ranked No. 3 on our list, makes weapons, including cruise missiles. All six top stocks appear in the accompanying table.

We advise investors to do additional research on any investments we identify here.

Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.

Ranking*CompanyTickerDividend Sustainability RatingMarket Cap. ($Bil)**Yield (%)Points
1Boeing Co.BA-NHighest138.72.410
2Lockheed MartinLMT-NHighest86.82.410
3RaytheonRTN-NHighest52.31.810
4CAECAE-TAbove-average5.51.89
5MacDonald Dettwiler & Assoc.MDA-TAbove-average2.52.17
6Magellan AerospaceMAL-TAverage1.01.56

Source: Dividend Advisor

*Ranking is determined by TSI Dividend Sustainability Score. Where overall points are the same, analysts considered P/E, dividend yield and industry outlook to decide final placements. **Market cap is in native currency