How To Invest In Defense Stocks To Capitalize On U.S. Government Spending In 2023

Key takeaways

  • The U.S. government is poised to spend about $800 billion on defense in the coming year
  • Some publicly-traded companies compete for government defense contracts that can be worth billions of dollars
  • Investors may want to consider investing in defense contractors to capture some of the profits U.S. defense spending creates

The U.S. government spends far more on defense than any other country, awarding contracts worth hundreds of millions of dollars to American companies that manufacture military technology and equipment.

Many investors see this as an opportunity to invest in companies with a mostly-guaranteed customer with significant financial resources. We’ll break down the defense budget and investment opportunities based on U.S. defense spending.

The U.S. federal budget and defense spending

Each year, Congress votes on a budget for the federal government. Invariably, it includes a significant amount of money dedicated to defense.

For 2023, the proposed budget totals $5.8 trillion. Most of that amount goes toward mandatory programs like Social Security and Medicare. $1.709 trillion is dedicated to discretionary programs.

The proposed budget for defense spending for 2023 is $795 billion, meaning U.S. companies that can provide military technology or equipment have a massive pool of funds to compete for.


Defense spending in other countries

To put American defense spending in perspective, it’s helpful to consider defense spending in other nations.

In fiscal year 2021, the United States spent roughly $800 billion on defense. This amount was more than the defense spending of China, India, the UK, Russia, France, Germany, Saudi Arabia, Japan, and South Korea combined.

China, the next biggest spender, dedicated $293 billion to defense, less than half of what the U.S. spent.

U.S. defense priorities

With its budget proposals, the White House publishes its priorities for using the funds it requests. These priorities can provide insight into how the government will direct the money it allocates to defense and other programs.

Some of the priorities for defense spending in 2023 are:

  • Supporting European allies and partners, including NATO and Ukraine
  • Countering persistent threats from China, Russia, North Korea, and Iran
  • Modernizing nuclear deterrents
  • Advancing cybersecurity programs
  • Enhancing biodefense and pandemic preparedness
  • Promoting climate resilience and energy efficiency
  • Building the Air Force by investing in a mix of aircraft
  • Optimizing shipbuilding for the Navy
  • Expanding long-range fire capabilities
  • Increasing space resilience
  • Strengthening the American supply chain and industrial base
  • Empowering disadvantaged businesses and underserved communities
  • Caring for servicemembers and the DOD civilian workforce
  • Fulfilling commitments to military families

This is a broad list of priorities but still offers valuable information for investors.

Defense stocks to consider

Investors can search for opportunities based on defense spending by knowing the government’s stated defense spending priorities.

For example, an investor might buy shares in a company that can strengthen the military’s industrial and logistic capabilities or in military contractors that develop or manufacture warplanes.

These are some of the top defense stocks to consider for 2023.

Lockheed Martin

Lockheed Martin is one of the top aerospace companies in the world and has a long history of collaborating with the U.S. government to provide military equipment. It has developed many different types of military equipment, including aircraft, missiles, cybersecurity tools, and space systems.

The company also offers services to the government, such as equipment maintenance and repair and logistics assistance.

Since the Air Force, space, and cybersecurity are all government priorities for 2023, Lockheed Martin is in a strong position.

Raytheon Technologies Corporation

Raytheon is another company with a long history of government collaboration. Like Lockheed, Raytheon provides a variety of aerospace and other defense products to the U.S. military and government. Raytheon also has commercial customers such as passenger airlines.

The company has recently won a few government contracts, including contracts for surface-to-air missile systems (worth $1.2 billion) and propulsion systems for Navy fighter planes (worth $4.4 billion). There’s no apparent reason Raytheon won’t continue to earn these lucrative contracts and see further success.

General Dynamics

General Dynamics is a Virginia-based company that offers a variety of products, including aircraft, submarines, ships, amphibious combat tools, and cybersecurity products. The company markets its products to both the government and commercial businesses.

The company has a healthy dividend yield slightly above 2.1% and has seen some price growth since early 2022. Investors may be interested in the company and seeing if it can continue its upward trend.

What it means for investors

The defense industry is unique compared to other industries. Companies heavily involved in defense draw a large portion of their revenues from government spending rather than from sales to the general public or other businesses.

On the one hand, that makes them reliant on the government. If they can’t land government contracts, their incomes will drop. On the other, it makes them more resilient than many businesses because defense spending is not closely tied to the overall economy.

That could make defense contractors an appealing opportunity for investors worried about the potential of an oncoming recession. That, combined with the U.S. committing to support Ukraine in its war against Russia, could offer additional growth opportunities for defense companies.

The bottom line

Defense stocks are typically less volatile than other businesses due to the relative stability of government spending. Given the uncertainty about the economy’s future, investors will likely find that stability appealing.

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