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US Defense Space Gaining From Divestments: 3 Stocks in Focus

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Over the last few years, an increasing number of divestment activities have been witnessed within the U.S. Aerospace – Defense industry. This could possibly be due to an existing business or an asset class failing to perform per company expectations, among other factors.

Let us discuss why defense companies within the U.S. have turned to divestment activities.

Significance of Divestitures in the Defense Space

In recent times, divestment of businesses in the defense space has become increasingly popular as it enables companies to increase focus on core businesses, eliminate redundancies and improve operational efficiency and cost structure. Furthermore, divestments have been pivotal for defense companies in focusing on more profitable assets with higher returns and paving the way for better market opportunities.

Per a McKinsey & Company report, defense companies that managed to systematically divest assets generated substantial surplus cash, rapid stock appreciation and sizable dividends, which resulted in the highest total returns to shareholders.

Is Covid-19 Influencing Divestment Decisions?

This year has undoubtedly been very challenging for companies operating across multiple sectors and industries, including defense, due to the impacts of the Covid-19 pandemic. This led to global economic turmoil and resulted in volatile market conditions, which has induced defense companies, irrespective of their size, to undertake divestment activities.

Notably, divestment decisions implemented this year have enabled companies to assertively streamline their portfolio of businesses, reduce debt and restructure supply chain activities, which took a major hit during the pandemic.

3 Defense Stock in Focus

As mentioned earlier, there are some major defense players that have taken up divestment activities in 2020, considering the current volatile market situation on a global scale and the numerous linked benefits.

In December, Northrop Grumman (NOC - Free Report) signed an agreement to sell off its federal IT and mission support services business to Peraton, an affiliate of Veritas, for $3.4 billion in cash. The divestment is in line with the company’s strategy of focusing on growing its core businesses, driving shareholder value and execution of its capital allocation strategy.

Raytheon Technologies (RTX - Free Report) , another big name in the defense space, signed a deal in October to divest its cybersecurity subsidiary, Forcepoint, to private equity firm Francisco Partners. The divestment is expected to fetch Raytheon around $1.5 billion in gross proceeds.

Earlier in June, General Dynamics' (GD - Free Report) Mission Systems unit divested its antenna systems business, SATCOM Technologies, to Communications & Power Industries, also known as CPI. The company divested the business in order to focus on core areas supporting U.S. Department of Defense and government agency customers. The divestment was also expected to provide enhanced market opportunities for both its Mission Systems and IT Services segments.

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