Iran Tensions Illustrate Defense Supply Shortages That Will Benefit These 3 Stocks

Ongoing tensions with Iran led the U.S. Defense Department to announce on July 27 two seven-year agreements with L3Harris Technologies (NYSE: LHX) and Lockheed Martin (NYSE: LMT) to expand propulsion capacity for Patriot and Terminal High Altitude Area Defense (THAAD) interceptors. The point is to address an ongoing shortage of missile defense systems.

The need to address the shortage also benefits RTX (NYSE: RTX), a key contractor and supplier of the Patriot and THAAD interceptors. All three defense stocks are up so far this year, but while L3Harris is up only 3%, RTX and Lockheed Martin are up by more than 17% and 19%, respectively. The run is likely to continue, though. Why I like each of these stocks:

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Lockheed has a big backlog and a big dividend

Lockheed is the prime contractor and system integrator responsible for manufacturing the overall THAAD system and its hit-to-kill interceptor missiles. As of the second quarter, the company had a record backlog of $230 billion, led by its multibillion-dollar awards for THAAD hit-to-kill interceptors and Patriot PAC-3 MSE missiles. This provides extraordinary multiyear revenue predictability.

Lockheed maintains a near monopoly in integrated upper-tier kinetic missile defense for the U.S. and international allies. That gives it strong margin protection.

In the second quarter, it reported revenue of $20.1 billion, up 11% year over year, and earnings per share (EPS) of $7.94, up 443% over the same quarter a year ago. The company has four segments: space, aeronautics, missiles and fire control, and rotary and mission systems. Missiles and fire control led the way in the quarter with an operating margin of 14.5%.

Management has raised its dividend for 22 consecutive years, including a 5% increase last year, to $3.45 per quarter. Its yield, even with the stock's increase this year, is 2.36% at its current share price, more than double the S&P 500 average yield. As production bottlenecks resolve and its operating margins expand, its free cash flow generation will continue to grow.

L3Harris benefits from missile demand, regardless of contracts

Through its Aerojet Rocketdyne business, L3Harris supplies essential solid-rocket motors and thrust-vector control systems for the THAAD and Patriot missiles. This allows the company to capture upside from missile demand regardless of which prime contractor wins specific program awards. The Pentagon's new seven-year deal calls for it to nearly triple production of propulsion parts for Patriot munitions and quadruple its manufacturing of crucial components for THAAD interceptors over the next seven years.

L3Harris specializes in high-margin technology segments -- including space payloads, electronic warfare, tactical communications, and night vision systems -- that drive higher overall segment operating margins.

In the second quarter, the company's cost-control initiatives and debt reduction led to improved profitability. It reported revenue of $5.9 billion, up 8% year over year, while the operating margin rose 60 basis points over the same period last year to 11.1%. EPS climbed 28% year over year to $3.13.

L3Harris continues to convert record order flow into an expanding backlog of $42 billion, while aggressive cost initiatives and asset sales support debt reduction and accelerating EPS. It also has a dividend yield of 1.61% at its current share price, and it increased its dividend by 4% this year, the 25th consecutive year it has boosted it.

RTX's Patriot missiles are in high demand here and abroad

RTX, through its Raytheon segment, is the main system architect and radar provider for the Patriot system, providing high-margin, long-term recurring revenue through U.S. and international military sales, maintenance contracts, software retrofits, and next-generation radar upgrades.

Led by rising demand to replenish depleted global missile inventories, RTX holds a record backlog of $289 billion through the second quarter. This order intake supports ongoing upward revisions to management's full-year earnings and free cash flow guidance.

In the second quarter, the company reported revenue of $24.7 billion, up 14% year over year, and EPS of $1.57, up 29% from the second quarter of 2025. Profit margin was 11.4%, up from 9.9% in the same period a year ago.

RTX's dividend yields around 1.27% at its current share price. It has increased its payout for 22 consecutive years, including a 6% raise this year to $0.73 per quarter.

Riding the military momentum

An unprecedented surge in global defense demand has pushed all three contractors to record order backlogs. With allied nations aggressively replenishing depleted missile stockpiles and upgrading air defense infrastructure, these companies have long-term revenue visibility well into the next decade. Their highly complementary relationship in crucial programs such as THAAD and Patriot ensures that all three capture steady top-line growth as defense budgets expand worldwide.

These defense majors present an attractive balance of cash flow generation, margin expansion, and above-average dividends. As supply chain bottlenecks ease, factory expansions come on line, and high-volume production accelerates, operating margins are expanding across munitions and aerospace segments.

Combined with growing free cash flows, low customer credit risk, and a proven track record of dividend hikes and share buybacks, all three stocks offer defense-focused value and resilient earnings compounders.

James Halley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends L3Harris Technologies and RTX. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.