The Aerospace and Defense industry has been very hot in recent years.The Aerospace & Defense ETF (ITA) has returned 141% over the past five years.In comparison, the S&P 500 index has gained 73% during that same time frame.

Why has this sector practically doubled the market index over the last five years?

The answer to that question is largely due to hot spots around the globe (the Middle East, the Korean Peninsula) combined with governments spending more on defense.The U.S. government, the largest buyer of defense products, spent $589 billion on defense in fiscal 2017.This was an increase of $9 billion from the previous year.For fiscal 2018, the government’s defense spending jumped to $700 billion and is expected to increase higher in the coming years. In February, members of the two major political parties agreed to a deal that would see defense spending add an additional $165 billion in defense spending over the next two years.

This increase in defense spending is going to benefit many of the major companies in this sector.As you can imagine, the share prices of many stocks in this sector have increased in the past few years due to these factors, but that doesn’t mean these stocks aren’t attractively priced.

This article will discuss the five best aerospace and defense companies. All five stocks pay dividends to shareholders. 

We will examine each company’s business, recent earnings results, dividend history and our expected total return, which you can see in the Sure Analysis Research Database. In the Sure Analysis Research Database, we determinetotal annual return based on the stock’s current yield, expected change in valuation and forecasted earnings per share growth through 2023.

Without further ado, here are the top five Aerospace and Defense companies in the Sure Analysis Research Database, ranked from low to high in terms of our total expected return.

Top Aerospace and Defense Stock #5: Raytheon Company (RTN)

Raytheon Company, the fifth largest military contractor in the world, was founded in 1922.The company’s first product was the S gas rectifier tube.This revelatory product eliminated the need for expensive batteries found in home radios.Today, Raytheon provides missiles and electronic, radar and communication systems to the U.S. and its allies.The company is divided into four divisions: Integrated Defense Systems, Intelligence Information & Services, Missile Systems and Space & Airborne Systems.Raytheon has a market cap of almost $56 billion and generated $25 billion in sales last year.The company employs ~64,000 people.

Raytheon reported 1st quarter earnings on April 26th.

Source: Earnings Presentation, page 5.

The company earned $2.20 per share, topping analysts’ estimates by $0.09.This was a 27% increase in earnings-per-share from Q1 2017.Raytheon’s revenue grew 4.5% year over year to $6.3 billion.Each segment of the company saw sales improve, led by Integrated Defense Systems 6.5%.Higher sales of Raytheon’s Patriot defense program was a main driver of sales growth in the quarter.The company’s backlog now stands at $38.1 billion, a 5.8% increase year over year.Raytheon spent $400 million to repurchase 1.9 million of its own shares during Q1.The average repurchase price was $211, an 8.1% premium to the current share price.

The company also updated its guidance for 2018.

Source: Earnings Presentation, page 8.

Due to a slightly lower than anticipated tax rate for the year, Raytheon sees earnings per share coming in above its original guidance.The company increased the midpoint of its earnings-per-share forecast to $9.80 from $9.65.Sales guidance was also raised slightly.

Over the last decade, Raytheon has increased earnings by an average of 6% per year.During the last recession, the company actually saw earnings-per-share increase.While the company has seen earnings declines on a year over year basis several times in the last ten years (2010, 2015, 2017), the general trend in earnings-per-share has been higher.

Using the midpoint of the company’s updated guidance, shares are trading at a multiple of 19.7.This is well above the stock’s 10-year average price to earnings ratio of 14.If shares were to revert to this target multiple by 2023, Raytheon’s valuation would contract 6.6% per year.

Raytheon has increased its dividend for the past fourteen years.Over the last ten years, the average growth rate has been 12%.The company increased its dividend by 8.8% on March 21st.At a price of $193, shares currently yield 1.8%.

Based on the company’s earnings growth rate, dividend yield and multiple reversion, we expect shares of Raytheon to offer an annual return of just 1.2% per year over the next five years.Raytheon is up just 2.74% in 2018, but has returned more than 35% since the beginning of 2017. We suggest interested investors wait for a pullback before adding this company to their portfolio.

Top Aerospace and Defense Stock #4: Lockheed Martin (LMT)

Created when Lockheed Corporation and Martin Marietta merged in 1995, Lockheed Martin is the world’s largest defense contractor by sales.The company had $51 billion in sales in 2017, with the U.S. Department of Defense contributing 60% of this total.Other U.S. government agencies and international clients make up about 20% each of remaining sales.