Economics of U.S. Military Interventions, Part 1

"The S&P earnings fell for three straight years between 2006 and 2009. Not one of the defense contractors showed a significant drop in EPS in any year and all are reporting higher earnings now than in 2006.

"On top of that, the cash flows for the defense contractors have improved and all four in this group has boosted their dividends in each of the last four years. Many people do not know that when the historical return of stocks of 9% is talked about, half that return is due to dividends.

"Thus, focusing on stocks that pay dividends greater than the market as whole is a good way to find stocks that should have some solid future return potential. Plus, if a stock price declines, the dividend yield rises and entices people to buy the stock.

"As a result, strong cash flows and dividends should cushion defense contractor stocks in a bear market. Those higher cash flows also allow EPS growth to occur via repurchasing shares as well as boosting the dividend. Thus, when the market is stronger, these are companies that still post good EPS gains to help the stock prices.

"Finally, the defense contractors trade at lower valuations than the market as whole. This also provides more downside cushion and creates potential upside if the valuation multiples expand. And these four companies are not just a hair cheaper than the market:

"Launched in 2002, The Vice Fund (vicefund.com) focuses on four industry groups-Alcohol, tobacco, gaming and defense. The managers believe that companies in these sectors have the potential to generate above average dividends and cash flow, which may increase the odds of generating total returns greater than the market averages. Many of the Vice-related companies have been reporting higher earnings and strong cash flows despite the current economic problems."

Concluding Comment

Continuing recession or not, defense firms will continue to make money.

I am not an investment adviser and nothing I say should be taken as a recommendation to buy or sell an asset.

>To order reprints of this article, click here: Reprints