Boeing Vs Raytheon Stock: Which is Best?

Boeing Vs Raytheon Stock: Which is Best? The United States isn’t shy about funding its military. In 2019, the US Department of Defense spent $732 billion, which dwarfed the rest of the world.

For context, the second largest spender was China at an estimated $261 billion, and countries like the United Kingdom, South Korea, and Japan spent less than $50 billion each.

With that in mind, it’s no wonder that investors want defense stocks in their portfolios. Among other things, there is clearly a demand for the product, and companies with the US government as a client can count on having their bills paid. 

Of course, as with any investment, there are important risks to consider – and then there is the question of which company is best-positioned to win those massive defense contracts. For many investors, the decision is between two top contenders – Boeing and Raytheon. Their question is Boeing vs Raytheon stock – which is best? 

Pros and Cons of Investing in Defense Stocks

The beauty of investing in the defense industry is that there is some predictability when it comes to revenues. The US Department of Defense projects planned purchases five years out, and there is plenty of diversity in terms of what it buys.

In addition to the obvious – ships, planes, and weapons – the military needs an extraordinary amount of infrastructure. There are IT contracts, building contracts, and a wide variety of supplies and services included in the defense budget. 

Better still, the companies developing technology and engineering for the US government don’t have to pay their research and development expenses out-of-pocket. Those costs are subsidized from the start. That means there is sufficient cash flow to deliver strong, reliable dividends to shareholders. 

There are, of course, some disadvantages to defense investing. One that is top-of-mind for many is the fact that these companies are building tools intended to take human life. It’s not usual for that to be a deal-breaker in the process of building a portfolio. 

In addition, investors in search of rapid growth and dramatic increases in stock prices are often disappointed. Defense projects tend to move quite slowly, so these sorts of investments are better suited for individuals in search of reliable dividend income and long-term increases in value. 

Defense = 25% Of Boeing Revenues 

When most people think of Boeing, commercial planes come to mind rather than defense contracts. After all, who hasn’t traveled on a Boeing 737, 747 or 777?

Unfortunately, Boeing has had non-stop bad news on the commercial front for the past couple of years, and its reputation as a leader in the space industry took a big hit, as well. 

The problems started with disasters that took down two 737 Max passenger jets, then there was the abject failure of Boeing’s December 2019 Starliner space taxi test.

On top of that, the novel coronavirus put a sudden stop to travel, both business and leisure, which is expected to result in a 55 percent year-over-year drop in airline passenger revenues industry-wide for 2020. 

This series of unfortunate events has many investors questioning whether Boeing stock is still a buy. It’s fallen from a March 1, 2019, peak of approximately $440 per share to a price hovering around $170 per share in August 2020. 

However, Boeing does generate at least 25 percent of its revenues from its work in defense. It produces military planes and helicopters, and it is working on an autonomous submarine project.

The company won several important contracts with the US government in the past two years, and it is one of the top competitors for a Canadian military contract worth $12 billion. Given the stability of defense work, some investors considering the purchase of Boeing shares believe now is the time to get stock at a relative discount. 

No one thinks Boeing is on the verge of bankruptcy, and nearly all industry experts expect the company to recover from its current woes at some point. The problem is that recovery appears years away, given the amount of new debt Boeing has taken on in recent months.

Furthermore, the future of the 737 Max remains in question, and many are concerned about the cultural health of a company that allowed such a deadly combination of flaws in the first place. 

In other words, new shareholders may see their investments pay off eventually, but there are likely less risky options in the defense space.

Raytheon Commercial Aviation Revenues = 46%

Pre-pandemic, Raytheon appeared to have a clear path forward in terms of delivering shareholder value in 2020 and beyond. The company merged with United Technologies to build an aerospace business, and the benefits expected from the combined company showed in stock prices. 

However, as mentioned, commercial aviation is struggling as a result of the COVID-19 pandemic, and Raytheon relies on commercial aviation for 46 percent of its revenue. The disruption to global travel has put Raytheon’s near-term results in question. 

Raytheon’s July 28, 2020, announcement of earnings results exceeded expectations by a large margin. Analysts had predicted just $13.5 billion in sales and earnings of $0.13 per share, but Raytheon delivered $14.3 billion in sales and earnings of $0.40 per share. Despite these impressive figures, stock prices dropped. The threat posed by commercial aviation’s decline is simply too much risk for many investors. 

Raytheon appears to be making the best of a bad situation, and it’s not necessarily a poor choice for new investors. However, given other, stronger options available in the defense industry, it isn’t the best choice, either. 

Raytheon Vs Boeing Stock: The Bottom Line

Investors in search of a solid defense company to add stability to their portfolios are likely better off with Raytheon shares instead of Boeing.

While Boeing does have a solid defense business, its primary source of revenue has historically been its commercial airliners. For the foreseeable future, the success of that division is in question, making Raytheon a better buy.

With that said, neither is particularly promising in the current environment. Defense giants Lockheed Martin and Northrop Grumman are far higher up on most analysts’ buy lists.

Alternatively, you may wish to consider gaining exposure to the defense industry without the risk of investing in individual companies by choosing a defense-focused ETF. Examples include SPDR S&P Aerospace & Defense, Invesco Aerospace & Defense, and iShares U.S. Aerospace & Defense. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.