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Why Defense Stocks Popped Today

What happened

Late Wednesday night, the U.S. Senate finally passed the $2 trillion Coronavirus Aid, Relief, and Economic Security Act (aka the CARES Act). This morning, stocks are up in response -- in particular, defense stocks like Lockheed Martin (NYSE: LMT), Heico (NYSE: HEI), and TransDigm (NYSE: TDG).

Heico and TransDigm were two of the three best-performing defense stocks of the past decade. Lockheed Martin wasn't (although it didn't do half bad, either). Today, Lockheed's lagging the other two companies' shares again, but was still up 7.5% as of 11:25 a.m. EDT. Heico was up 8.9%, and TransDigm 11.4%.

Image source: Getty Images.

So what

The stimulus bill contains $500 billion in loans for large companies affected by COVID-19.

On top of the initial $500 billion, the CARES Act also contains financial assistance for the defense industry. Specifically, there is $17 billion in loans and loan guarantees for businesses crucial to maintaining national security. Defense stocks such as Heico and TransDigm (and certainly Lockheed Martin, the world's biggest pure-play defense stock) should all qualify for this assistance.

Now what

Before you rush out and join everyone else in buying shares of these three defense stocks, however, there is one more thing to be aware of: As a condition of taking the loans and accepting the loan guarantees contained in the CARES Act, companies must commit to not pay dividends or make other capital distributions to their shareholders (i.e., buy back stock) until 12 months after the loan or loan guarantee is no longer outstanding.

Therefore, if dividend income is one reason you're looking at investing in Lockheed, then that's a factor you will want to bear in mind. At 3%, Lockheed's dividend yield is much larger than average; for the next year, at least, that dividend may go away. TransDigm, however, pays no dividend, and Heico only has a 0.2% yield.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends TransDigm Group. The Motley Fool recommends Heico. The Motley Fool has a disclosure policy.


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