Five Dividend-paying Aviation Investments to Buy 05/31/2024 | | | Years ago, I came across a stock market ticker…
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The five dividend-paying aviation investments to buy amid industry consolidation should gain value as competition shrinks as industry rivals are acquired. Two exchange-trade exchange-traded funds (ETFs) and three aviation stocks form the five dividend-paying opportunities in the industry that stand out right now to key observers.
Demand in the United States is on the rise due to its national security doctrine that aims to use military modernization to deter adversaries, as European countries boost their NATO budgets to stay in good standing with the alliance, according to a recent research report by Citigroup. Many aviation companies serve both commercial and military customers, with the latter segment showing growth as demand for defense-related products is surging with Russia's war against Ukraine and the conflict in the Middle East between Israel and Hamas militants ongoing in Gaza.
Five Dividend-paying Aviation Investments to Buy Amid Rising Demand
Company backlogs have grown for the past three years, Citigroup wrote. Profit margins are likely to rise as new bookings reflect the current cost and supply chain environment, Citigroup continued.
"Look to invest in companies with accelerating revenue growth and margin expansion," the report continued.
Bob Carlson, a former pension fund chairman who heads the Retirement Watch investment newsletter, suggested that investors consider exchange-traded funds (ETFs) focused on aviation and defense. Many of the investments Carlson recommends in his Retirement Watch newsletter feature ETFs.
Bob Carlson, who heads Retirement Watch, answers questions from Paul Dykewicz.
Five Dividend-paying Aviation Investments to Buy: GCAD
The first of five dividend-paying aviation investments to buy is Gabelli Commercial Aerospace & Defense (GCAD). The ETF has only has been open since early 2023, so its track record is still developing.
Like other Gabelli funds, GCAD is actively managed and does not try to track an index, Retirement Watch leader Carlson told me. GCAD invests in income-producing securities in aviation, aerospace and defense.
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Recently, about 95% of the fund was in the industrials sector and the other 5% was in technology. It owned 26 stocks and had 63% of the fund in the 10 largest positions.
The five biggest holdings at last check were Moog (NYSE: MOG:A), Boeing (NYSE: BA), Spirit Aerosystems Holdings (NYSE: SPR), Ducommun (NYSE: DCO) and Curtiss-Wright. The fund's dividend yield is 0.9%.
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Carlson also told me he likes the dividend-paying SPDR S&P Aerospace and Defense (XAR), an ETF designed to track the S&P Aerospace & Defense Select Industry Index. XAR recently had 32 holdings with 43% of the fund in the 10 largest positions.
The five largest XAR holdings, all greater than 4% of the fund, recently have been Woodward Inc. (NASDAQ: WWD), Howmet Aerospace Inc. (NYSE: HWM), RTX Corp. (NYSE: RTX), Curtiss-Wright (NYSE: CW) and HEICO Corp. (NYSE: HEI).
The dividend-paying fund has been on a sharp ascent lately, as the chart below shows. Its 10-year average annual return is 4.45%.
Chart courtesy of www.stockcharts.com
GE Aerospace is One of Five Dividend-paying Aviation Investments to Buy
General Electric Company (NYSE: GE) has been spinning off business units such as GE Aerospace, formerly known as GE Aviation. The GE Aerospace executives offered guidance in March 2024 that the business unit that began operating with the ticker symbol GE on April 2 would earn more than $6 billion in operating profits this year with the total rising 66.77% to reach $10 billion in 2028.
The Citigroup investment firm set a 12-month price target of $186 that is derived using a 21.5X enterprise value (EV)/earnings before interest, taxes, depreciation and amortization (EBITDA) multiple on its estimates one year from now. That multiple is an average EV/EBITDA of comparable companies, Citigroup wrote.
Chart courtesy of www.stockcharts.com
"The commercial aerospace industry is intrinsically risky given its vulnerability to unpredictable shocks that cannot be incorporated into earnings models, such as terrorism, volatile oil prices and epidemics (COVID / SARS), Citigroup wrote. "Further, the industry is highly correlated to economic growth, and relies on economic expansion for air traffic growth."
Evendale, Ohio-based GE Aerospace's exposure to the defense market is affected by changes in political will, global threats to the United States and its allies, the state of the federal budget, and the condition of existing U.S. and allied military equipment, Citigroup wrote. GE's shares may underperform Citigroup's target price if the economy enters a prolonged recession that results in decreased airline traffic and plane orders. Shares could underperform if global peace broke out and DoD budgets were severely cut, but the latter possibility seems remote with wars raging in Europe, the Middle East and Africa.
GE Aerospace plans to hire 900 engineers this year to support existing are aircraft engine programs and develop new technologies, company official said. In 2023, GE Aerospace spent approximately $2.3 billion on aviation research and development, including external customer and partner funding.
VSE Is Another of the Five Dividend-paying Aviation Investments to Buy
VSE Corporation (Nasdaq: VSEC), of Alexandria, Virginia, recently completed a secondary stock offering as it aims for expansion in the fragmented aftermarket aerospace industry, wrote Chicago-based aviation, aerospace and defense analyst Louie DiPalma. Following the offering, DiPalma revised VSE's projected net leverage to 3.3 times at the end of the second quarter, compared to 4.1 times net leverage in the second quarter before the offering.
VSE is a provider of aftermarket distribution and repair services that operates through its two key segments. The company seeks to significantly enhance the productivity and longevity of its customers' high-value, business-critical assets.
To that end, VSE's Aviation segment provides aftermarket parts distribution and maintenance, repair and overhaul services for components and engine accessories to commercial, business and general aviation operators. The company's Fleet segment specializes in part distribution, engineering solutions and supply chain management services for the medium and heavy-duty fleet market.
Chart courtesy of www.stockcharts.com
"We see greater than 15% upside to shares based on our expectation for accretive M&A activity, multiple expansion and EBITDA growth," DiPalma wrote. "Accordingly, we reaffirm our outperform rating."
Using the new share count of 18.4 million, VSE shares trade at 10.7 times William Blair's 2025 adjusted EBITDA estimate, compared with industry peers and M&A comparable numbers in the 9- to 14-times range, DiPalma wrote. The investment firm forecasts VSE's multiple will expand as it closes the divestiture of its federal and defense business and makes strategic acquisitions. | | | Jerome Powell just made buying a home more challenging, and the Magnificent 7's momentum is collapsing.
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Learn the top 3 stock trends we're looking at right now for explosive bullish potential. Click Here... | | | | Textron Joins Five Dividend-paying Aviation Investments to Buy
Textron Inc. (NYSE: TXT), of Providence, Rhode Island, is organized in six segments: Bell, Textron Aviation, Textron eAviation, Industrial, Textron Systems and Finance. Its businesses produce hundreds of products for customers worldwide in a range of industries spanning aerospace and defense, specialized vehicles, turf care and fuel systems.
The company's management seeks to invest in next-generation products and services designed to succeed in the marketplace. One of the investment firms that currently is recommending Textron is Citigroup.
Textron leaders recently met with Citigroup's aviation analysts and one of the key topics of discussion was aviation demand and pricing. Demand across the segment remains robust, with management suggesting that book-to-bill is likely to remain 1x or better on a trailing 12-month basis for the foreseeable future, wrote Citigroup's lead aviation and defense analyst Jason Gursky.
"Backlog stretches out roughly 24 months, allowing for pricing at, or above inflation," Gursky wrote in a recent research note. "Importantly, it doesn't appear the company will chase aggressively priced fleet campaigns. In our view, this aligns with what we've been hearing from other OEMs and from brokers in the used market. It also aligns with our thesis that the pandemic increased the number of people and companies flying private, and that this new demand is likely to remain sticky. We were also encouraged to hear that a new clean sheet aircraft requiring significant investment and risk doesn't appear to be on the near-term horizon."
Chart courtesy of www.stockcharts.com
As far as aviation margins, Gursky wrote that investors have been focused on the disconnect between management's historic commentary that incremental operating margins in the segment are likely to run between 20% and 25% and guidance for 2024 that suggests something less. Management pointed out that the top end of the outlook range for the year is 20% and that there is some level of conservatism baked in given continuing supply chain bottlenecks, he added.
"In our view, this all seems a bit transitory and doesn't point to a structural change in the margin outlook for the business -- so long as the bottlenecks abate over time and pricing allows the company to cover inflationary costs."
Geopolitical Risk Rises in Rafah
President Biden said on May 31 that he supports a new ceasefire proposal in Gaza that would include the release of the hostages taken from Israel by Hamas militants in a murderous raid on Oct. 7. The three-part proposal calls for a six-week ceasefire with the Israel Defense Forces (IDF) pulling back from populated areas of Gaza.
There further would be increased of humanitarian aid, as well as an exchange of some hostages for Palestinian prisoners. The end goal would be a permanent "cessation of hostilities" and a major reconstruction plan for Gaza.
The proposal follows slightly more than a week ago when the chief prosecutor of the world's top war crimes court announced on Monday, May 20, that he is seeking arrest warrants for top leaders of Israel and Hamas for "crimes" committed during their ongoing seven-month war. Israel's Prime Minister Benjamin Netanyahu, his Defense Minister Yoav Gallant and Hamas leaders Yehia Sinwar, Mohammed Deif and Ismail Haniyeh. each was accused of war crimes, along with crimes against humanity, in Gaza and Israel, respectively.
Netanyahu called the prosecutor's accusations against him a "disgrace," and an attack on the Israeli military and all of Israel. He vowed at that time to press ahead with Israel's war against Hamas and keep seeking the freedom of the hostages taken during an Oct. 7 attack against Israel.
Israel is seeking to find and destroy an extensive tunnel system in neighboring Gaza that has been used to stockpile weapons, as well as hide the Hamas leaders and militants who were responsible for the Oct. 7 attack in Israel that killed an estimated 1,200 people and took 240 hostages into Gaza. The battle recently extended into Rafah, where Hamas militants have hunkered down in the midst of a large civilian population that heightens the risk to human life.
The Gaza Ministry of Health estimates that a total of more than 35,000 Hamas fighters and civilians have lost their lives since the war began Oct. 7.
Russia's Push Forward in Ukraine Leads Western Countries to Resist
Russian forces have been penetrating the border area near Kharkiv, Ukraine's second largest city, but Western allies of Ukraine are starting to relax restrictions on the use of weapons they supply. With Ukraine forces outnumbered and outgunned, Russia's stepped up attacks of of Ukraine is forcing Western leaders to acknowledge that Ukraine must be allowed to fire at military targets in the invaders' territory.
Russia's leaders have adopted a "meat grinder" war strategy of sending overwhelming waves of soldiers forward to wear down Ukrainian forces and expose their locations to kill as many of the defenders as possible. An overall death toll of more than 50,000, estimated by the BBC, is eight times higher than the only official public acknowledgement of fatality numbers released by Russia in September 2022.
The five dividend-paying aviation investments to buy are benefiting from strong demand amid ongoing wars and increased travel. Investors who want to profit can ride those opportunities and the tailwinds pushing them forward. | | | Sincerely,
Paul Dykewicz, Editor
DividendInvestor.com
| | About Paul Dykewicz: Paul Dykewicz is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, Seeking Alpha, GuruFocus and other publications and websites. Paul is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is the editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul also is the author of an inspirational book, "Holy Smokes! Golden Guidance from Notre Dame's Championship Chaplain", with a foreword by former national championship-winning football coach Lou Holtz. Follow Paul on Twitter @PaulDykewicz. | | | | | |
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