Lockheed Martin Corp (NYSE:LMT), the largest defense contractor in the world, represents an ideal mix between growth and stability among non-cyclical stocks. Characterized by strong cash flows, secure government contracts, and high dividend payouts, Lockheed Martin should be seen as a stable, long-term growth story. Over the past three decades, Lockheed Martin has managed to increase its dividend payouts by an average annual rate of 10 percent. Over the past 5 years, Lockheed Martin’s dividend payouts have achieved 16 percent annualized growth.
While most non-cyclical stocks are in the consumer staples sector, Lockheed Martin operates in the security and defense sector (a traditionally capital intensive sector). However, unlike CPG companies, Lockheed Martin benefits from secure (non-competitive), highly profitable government contracts. Lockheed Martin’s current customer breakdown:
– U.S. Department of Defense = 65 percent of total revenue
– Foreign Government Agencies: 20 percent of total revenue
– Other U.S. Government Agencies = 15 percent of total revenue
While some shareholders may view Lockheed Martin’s customer concentration as a risk, it can be seen as a positive signal for stable growth. Earlier this year, the U.S. senate passed a $700 billion defense policy bill. This bill backs the Trump’s administration in its call for higher defense spending and will provide about $640 billion for the Pentagon’s main operations (buying weapons). The bill will also provide roughly $60 billion to fund the conflicts in Syria, Afghanistan, Iraq, and elsewhere. Lockheed Martin will be the defense contractor that is the main beneficiary of this bill.
From a global perspective, the current defense spending environment will also support an uplift in revenue derived from Foreign Government Agencies. Lockheed Martin will benefit from the approved sales of ballistic missiles and THAAD units / ground self defense technologies, along with an increase in restoration services for both Japan and South Korea in response to the North Korean nuclear threat. Additionally, Lockheed Martin recently inked a deal to co-manufacture F-16s in India with the country’s largest conglomerate, Tata Group. And last but not least, twenty-five NATO members have recently committed to increasing their annual defense spending at the fastest pace in 3 years. Overall, Lockheed Martin is the prime beneficiary of global geopolitical tensions.
Taking these growth drivers into account along with Lockheed Martin’s current order backlog (which is at all-time highs), the company will likely maintain its ability to provide shareholders with a secure income stream from rising dividend payouts.
In terms of valuation, when valued on GAAP earnings, the company’s Price/Earnings ratio of 25.5 can be viewed as stretched when compared to the industry average of 22.8. However, the company’s Price/Cash flow ratio of 16.2 is healthy and in line with the industry average of 16.1.
Overall, for long-term investors, Lockheed Martin represents a unique mix of stable growth and high dividend payouts at a healthy valuation.