Skip to comments.Huge Defense Sector Cuts, What This Means for Your Investments
Posted on 02/16/2013 10:46:26 AM PST by blam
Huge Defense Sector Cuts, What This Means For Your Investments
Companies / Sector Analysis
February 16, 2013 - 11:44 AM GMT
Sasha Cekerevac writes: March 1 is a very big day for many people. Unless Obama and the Republicans make a deal prior to that date, billions of dollars in spending cuts will be enacted.
Of all the areas that will be hit, I think the defense market sector will bear the brunt of the cutbacks and the future viability of corporate earnings in this sector is certainly in doubt.
At this point, Pentagon officials are now planning for $46.0 billion in cuts for the remainder of 2013. The total amount to be cut in the military market sector is $1.2 trillion over the next decade. (Source: Nissenbaum, D., Pentagon Readies Budget Ax, The Wall Street Journal, February 11, 2013.)
The U.S. Department of Defense has already laid off approximately 46,000 part-time workers. We could see additional layoffs, as well as furloughs. There are thousands of other workers employed at private firms in the defense market sector that will be affected, as budget cuts will crimp corporate earnings.
Clearly, for the defense market sector, the future is cloudy at best. Corporate earnings for most companies throughout the defense market sector will have difficulty growing. When total revenues are declining, higher corporate earnings are extremely rare.
Unfortunately, this pain is actually needed for the long-term fiscal health of the country. While corporate earnings will be reduced and jobs will be lost in the defense market sector, continuing to spend such a massive amount of public funds in this area is irresponsible and clearly not warranted at this time.
Looking at 2011 data, the U.S. military spending was 41% of the total for the entire world. The U.S. spent five times as much on the defense market sector as China, and 95 times more than Iran. (Source: World Military Spending, Global Issues, last accessed February 13, 2013.)
Simply put, we cant afford to spend money the way we did in the past; cuts need to be made. The defense market sector will just have to adjust to a lower level of corporate earnings.
This means investing in that market sector will be extremely difficult for the near future as corporate earnings start to stabilize at lower levels.
Chart courtesy of www.StockCharts.com
Lockheed Martin Corporation (NYSE/LMT) is already starting to see the effects from investors realizing that cuts in the defense market sector will become a reality. The reduced revenues will ultimately result in lower levels of corporate earnings.
The company does issue a large dividend yield, currently over five percent. With the payout ratio of approximately 50%, we will have to see exactly how the cuts in the defense market sector will impact corporate earnings and if a reduction in the dividend payout might need to be made.
This is a difficult time for the entire defense market sector, as well as the country. On the one hand, no one wants to see layoffs and reduced corporate earnings; on the other hand, the country needs to get its fiscal house in order. Considering how much of the budget military spending consumes, it certainly cant be left untouched.
Investors in the defense market sector have a difficult road ahead. Cuts will certainly be a part of life for many years, most likely along with reduced levels of corporate earnings. While companies in this market sector currently issue strong dividend yields, these dividends could be in question over the next decade.
We will have to wait and see what sort of deal will be structured before coming to any conclusion.
I am worried about what it will means for employment.
Except in Entitlements, of course, which are 62% of all Federal spending. We have money hand over fist for those.
But don't worry, the Fed will keep moving zeros on computer screens to keep the money-out-of-thin-air stock market afloat....until it all comes crashing back to reality.
* Reference: PJ O'Rourke's Circumcision Precept (O'R.C.P.): "You can take 10% off the top of anything" and and nobody will notice much if any difference.
Gotta keep “Pornisha” poppin’ out them “dem-slaves”, ya kno...
The people, in my sons (a physicist) department that were laid-off thursday...and the survivers placed on a four day work week....they noticed.
But, I understand the point.
A lot of the current military budget reflects operations in 2 war zones.
Those operations are coming to an end.
Unfortunately, the way these things work is, the commanders who had increased budgets will whine and point fingers as to who is spending what and eventually Congress will axe ALL budgets without regard as to need or value in an effort to be fair.
And America swirls around the bowl one more time.
You’re doing a fine job Obama.
So what do you do, run to bonds?
Many a invention, idea , innovation has come out of this process. How about NASA... in their search for solutions they gave us countless things, computers, crazy glue and the patty stacker.
It is truly a designed intent to strip America of its advantages.
A four day work week would be a 20% cut, which is a lot more than a 9% cut. Rhetorically, I'll ask if you think they're cutting back on the budget for defense researchers and not the budget for Gulfstream Vs for the Generals. I'd suggest that it should be a no-brainer to cut 9% fluff out of the US military budget without even trying very hard. But the fact that they are cutting back on stuff that they shouldn't be cutting and leaving the stuff that they should cut doesn't mean they shouldn't and can't cut.
Yeah. The government can either cut smart, or they can cut dumb. For many years they have been able to cut in dumb ways, which make voters panic and insist on tax hikes to bring back the good stuff that just got cut.
I’m hoping that voters allow the current round of cuts, even if dumb, and then demand more cuts. Eventually, we might see the government cut smart.
From that perspective, if the government cut smart, they could save big bucks and almost nobody would notice. But for now, with dumb cuts, some good people will suffer. Its intentional.
But the thing to do now is give incentive to the private sector to soak that up.
We can’t go hitting the Teachers union,Public parks or Health care for illegals.
MSM never advertises that; don't want to get the O base angry.
All they advertise is military cuts to try to get the GOP to back down.
Funding for Toad Crossings, African American Studies,Hispanic Heritage Festivals and Free Electric Car Charging Stations will remain at current levels. /s
My deadlines and commitments didn’t get cut, but we laid off two software engineers and another one goes next week. There aren’t enough cycles left to finish the contracted work. My lead gui developer dumped 3 critical bugs on me the night before a delivery build. The computers and my fingers can only go so fast. I fixed one of three by 10 PM. Two remain. I’m out of funded hours for the pay period. Stupidity on steroids. One of the layoffs has a replacement job (thankfully for him). If I had budget to hire his replacement, it would take a year to get clearance and more time to train.