Defense Stocks After the Peace Dividend That Never Came

The Setup

The defense sector does not generate headlines the way AI stocks do. Nobody is posting Lockheed Martin memes on social media. Defense primes do not have charismatic CEOs doing podcast tours. The sector is, by design, quiet, methodical, and deeply unsexy.

That is precisely why it is worth examining right now. While the market has spent the past two years pricing AI infrastructure as though compute demand will grow forever, defense stocks have been compounding earnings, growing backlogs, and raising dividends without attracting the kind of speculative premium that makes entry points dangerous.

The macro backdrop is the strongest it has been for defense companies in a generation. The U.S. is conducting active military operations in Iran (Operation Epic Fury). NATO allies are scrambling to meet and exceed the 2% of GDP spending floor. Munition stockpiles across the Western alliance are at their lowest levels since the Cold War. And the proposed defense budget for fiscal year 2027 would represent the largest single-year increase in military spending in American history.

This article examines three defense primes, each positioned differently within the same structural tailwind, and evaluates whether the financial data supports an investment thesis at current prices.

The Budget Nobody Expected

In January 2026, President Trump proposed setting U.S. military spending at $1.5 trillion for fiscal year 2027. The FY2026 defense budget was $901 billion. Congress passed the final FY2026 appropriations bill on February 3 with $839 billion in Pentagon funding. A jump from $901 billion to $1.5 trillion would represent an increase of roughly $600 billion, or 67%, in a single year.

Whether Congress approves the full $1.5 trillion is an open question. The detailed budget request is scheduled for release on April 21. But even a fraction of that increase would be transformative for the defense industrial base. And the direction of travel is not partisan: the bipartisan consensus on defense spending has shifted decisively higher across both parties, driven by the Iran conflict, China deterrence requirements, NATO obligations, and the munitions restocking imperative.

The Pentagon's FY2027 budget request includes a proposed 188% increase in missile procurement funding, according to Breaking Defense. PAC-3 MSE interceptor procurement could jump from 357 rounds in FY2026 to 3,203 in FY2027, nearly a nine-fold increase. THAAD interceptors would rise from 55 to 857. JASSM-ER production would more than double from 381 to 821 rounds. These are not aspirational figures. They are funded line items in a formal budget request.

Three Names, Three Angles

Lockheed Martin is the platform scale play. It is the world's largest defense contractor by revenue, and its portfolio spans the most critical programs in the U.S. arsenal: the F-35 Joint Strike Fighter, the PAC-3 missile interceptor, the HIMARS rocket system, and classified space programs. It just secured a $4.7 billion undefinitized contract to accelerate PAC-3 MSE production, and has invested over $7 billion since 2017 to expand capacity across more than 20 facilities.

The record $194 billion backlog, up $17 billion or 17% from the prior year, equates to roughly 2.5 years of revenue at current run rates. This is the fourth consecutive year of backlog growth. The Missiles and Fire Control segment, which produces the munitions most in demand, grew revenue 14% to $14.5 billion in 2025. Management guides for approximately 5% revenue growth and 25% segment operating profit growth in 2026.

RTX is the missiles and sustainment play. Through its Raytheon segment, it is the sole manufacturer of the Patriot missile system, the Tomahawk cruise missile, the Stinger shoulder-fired missile, and the Javelin anti-tank system. These are the weapons systems that are being expended at historically high rates and must be replenished. RTX also secured a $50 billion umbrella contract from the Defense Logistics Agency to supply Patriot systems, parts, and sustainment over a 20-year period.

The $268 billion total backlog is the largest of the three companies. The defense backlog alone stands at $107 billion. Raytheon segment revenue grew 7% in Q4 on Patriot, GEM-T, Tomahawk, and Evolved SeaSparrow volume, with adjusted operating profit up 22%. Munitions output across critical programs rose 20% in 2025, and management guided for further increases in SM-6 and Tomahawk production in 2026. The full-year book-to-bill ratio of 1.56 means orders are growing significantly faster than revenue.

RTX also owns Pratt & Whitney (jet engines for the F-35 and commercial aircraft) and Collins Aerospace (avionics and mission systems), providing diversification across both defense and commercial aerospace. The commercial aftermarket business provides counter-cyclical revenue that defense-pure plays lack.

General Dynamics is the submarines and optionality play. Its Marine Systems division builds the Columbia-class nuclear-powered ballistic missile submarines (the Navy's top shipbuilding priority) and Virginia-class attack submarines through its Electric Boat subsidiary. Submarine tonnage produced increased 13% in 2025. These are multi-decade programs with no commercial competitor and no substitute. The combat systems segment, producing land combat vehicles, weapons systems, and munitions, posted a full-year book-to-bill of 2.1 times, meaning orders came in at more than double the rate of deliveries.

The optionality comes from Gulfstream, the company's business jet division. Aerospace revenue surged 45% in Q1 2025 as Gulfstream ramped deliveries of the G700 and G800. For the full year, the Aerospace segment had a book-to-bill of 1.3 times with robust order activity. Gulfstream provides something the other defense primes do not: a high-margin commercial business with its own growth cycle that is completely independent of government budgets.

General Dynamics ended 2025 with $118 billion in backlog, up 30% from a year earlier. Total estimated contract value, including unfunded options, reached $179 billion, up 24%. Every segment grew revenue and earnings.

The Backlog Is the Story

Combined backlog across the three companies exceeds $580 billion. To put that in context, it is more than the entire GDP of Sweden. It represents years of contracted, funded revenue that will flow through income statements regardless of quarterly market sentiment.

Defense backlog is structurally different from commercial backlog. These are multi-year government contracts with cost-plus or fixed-price structures, backed by the sovereign credit of the United States. They do not cancel because a CEO changes strategy. They do not evaporate because consumer sentiment shifts. They are closer to annuity income streams than to traditional corporate revenue, which is why defense earnings have a bond-like quality that the multiples do not fully reflect.

All three companies posted book-to-bill ratios well above 1.0 in 2025, meaning new orders exceeded deliveries across the board. Lockheed's backlog grew 17%. General Dynamics' grew 30%. RTX's defense backlog stands at $107 billion. This is not a one-quarter anomaly. It is a sustained, multi-year trend of demand outpacing the industry's capacity to deliver, a dynamic that gives the primes pricing power and revenue visibility that few other sectors can match.

Munitions Restocking Is a Decade-Long Tailwind

The munitions restocking cycle is the single most important driver of defense earnings over the next 5 to 10 years, and it operates independently of which party controls Congress or the White House.

U.S. munitions stockpiles have been depleted by aid to Ukraine and Israel, by Operation Epic Fury in Iran, and by the broader realization that existing inventories are insufficient for a potential conflict with China in the Indo-Pacific. The Heritage Foundation has noted that Patriot missiles, more than a quarter of all THAAD interceptors ever procured, and a year's worth of Standard Missile-3s have been expended at exceptionally high rates.

The Pentagon's response has been structural, not incremental. The proposed FY2027 budget includes a 188% increase in missile procurement. PAC-3 MSE production would nearly nine-fold from 357 to 3,203 rounds. THAAD interceptors would jump from 55 to 857. These are not hypothetical. Framework agreements have already been signed with Lockheed Martin and RTX to expand production capacity, and the first contracts are being awarded.

Lockheed has committed to investing billions over the next three years to expand and modernize more than 20 facilities across five states. RTX plans $3.1 billion in capital expenditures in 2026 alone. Both companies increased munitions output by 20% in 2025 and guided for further increases in 2026.

The restocking dynamic is bipartisan because it is driven by operational necessity, not political preference. Whether the driver is deterring China, supporting NATO, or replenishing stocks consumed in active operations, the conclusion is the same: the defense industrial base must produce more weapons at a faster rate for the foreseeable future. That is a tailwind that does not reverse with an election cycle.

The Income Case

For income-oriented investors, defense primes offer a combination that is rare in the current market: growing dividends backed by contracted government revenue with multi-year visibility.

Lockheed Martin yields approximately 2.2% with 24 consecutive years of dividend increases. The annual payout is $13.80 per share with a payout ratio around 62%, leaving room for continued increases. Free cash flow of $6.9 billion comfortably covers the dividend and share repurchases.

RTX yields roughly 1.3%, lower than the other two, but backed by the largest absolute free cash flow at $7.9 billion and a 2026 FCF guide of $8.25 to $8.75 billion. The commercial aerospace aftermarket provides a revenue stream that grows with global air travel, adding diversification that pure defense plays lack.

General Dynamics yields approximately 1.7% with a track record of consistent increases. Gulfstream's margin expansion (operating margins up 210 basis points to 14.3% in Q1 2025) adds a growth kicker to the dividend story that is independent of defense budgets.

The dividend coverage quality matters as much as the yield. Defense revenue is contracted, multi-year, and backed by sovereign credit. These are not dividends funded by cyclical consumer spending or commodity prices. They are funded by the closest thing the private sector has to government-guaranteed cash flows.

What Could Go Wrong

A peace breakout. The most obvious risk is a de-escalation of global conflict that reduces the urgency of defense spending. A ceasefire in Iran, a diplomatic resolution with China, or a shift in NATO commitment would all reduce the political momentum behind budget increases. This is low probability in the current environment but remains the scenario that would most directly compress defense multiples.

Budget sequestration or political gridlock. The $1.5 trillion proposed budget requires Congressional approval. If deficit concerns dominate the debate, or if bipartisan support fractures, the actual budget could come in significantly below the headline number. Defense companies have navigated sequestration before (2013), but it compressed revenue growth for several years.

Supply chain and labor constraints. The defense industrial base cannot scale overnight. Skilled labor shortages, specialty material bottlenecks, and long lead times for critical components mean that even with unlimited funding, production increases take 18 to 36 months to materialize. If Congress approves funding that exceeds industry's capacity to deliver, the spending authority creates political pressure but not immediate revenue.

Cost-plus contract renegotiations. The Pentagon has historically pushed back on contractor margins during periods of rapid spending growth. If the primes are perceived as earning excessive profits on taxpayer-funded programs, political pressure to renegotiate contract terms could compress margins even as revenue grows.

Valuation overshoot. Defense stocks have rallied significantly. Lockheed is up roughly 27% year-to-date. RTX is up about 11%. At some point, the market will fully price the backlog and budget tailwinds, and further upside will require earnings beats rather than multiple expansion. Investors entering at current prices need the earnings trajectory to continue, not just the narrative.

The Thesis

The investment case rests on three pillars.

First, record visibility on a bond-like revenue stream. Combined backlog of $580 billion across the three companies provides years of contracted revenue backed by sovereign credit. Defense backlog does not cancel with economic cycles or consumer sentiment shifts. It is the most durable form of corporate revenue available in public markets.

Second, a multi-year munitions restocking cycle that is bipartisan and operationally necessary. The Pentagon has proposed a 188% increase in missile procurement for FY2027. Patriot, THAAD, Tomahawk, JASSM, and SM-6 production are all ramping with multi-year framework agreements already in place. This is not discretionary spending. It is the replenishment of depleted inventories that the military needs regardless of which party holds power.

Third, reasonable multiples relative to the growth and visibility on offer. These companies are not priced like AI stocks. They trade at multiples that reflect steady growth, not speculation. The combination of 5% to 10% revenue growth, expanding margins, growing dividends, and $580 billion in backlog is available at prices that leave room for earnings to drive returns, rather than requiring multiple expansion.

Lockheed offers platform scale and the broadest product portfolio in the sector. RTX offers direct exposure to the munitions restocking cycle through its monopoly positions in Patriot, Tomahawk, and Stinger, plus commercial aerospace diversification. General Dynamics offers submarine program dominance and Gulfstream optionality.

The risks are real. Budget politics can shift. Peace can break out. Supply chains can bottleneck. But the balance of evidence, based on the backlog data, the budget trajectory, the munitions depletion math, and the current valuations, suggests that defense stocks are one of the few sectors in the market where the fundamentals have been getting stronger faster than the stock prices have been rising.

At Wealth Engine Pro, the philosophy is to evaluate companies on what they are, not what the narrative says they should be. For 30 years, the narrative on defense was that the peace dividend would shrink the sector. The peace dividend never came. The backlogs did. And the data says the companies positioned to fill those backlogs are worth more attention than the market is giving them.