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Lockheed Martin: Trust the Cash Flow
Stock Analysis & Ideas

Lockheed Martin: Trust the Cash Flow

Lockheed Martin Corporation (LMT), one of the world’s largest aerospace and defense contractors, has seemingly struggled lately. At least as far as the company’s stock goes, anyway, which has lagged the overall market and is currently trading at around 20% lower from last year’s high.

While the market has rotated away from defense stocks likely amid future budget fears, pulling Lockheed lower, the company’s cash flows remain robust, with its backlog sitting at solid levels. Furthermore, amid the share decline, the stock is offering an above-average yield of 3.3%, which along with the ongoing buybacks, make for fantastic tangible returns at the stock’s current valuation.

In my view, quality companies such as Lockheed rarely go on sale. With a positive earnings growth outlook ahead, in my opinion, shares present a profitable opportunity at their current levels. Hence, I remain bullish on Lockheed Martin. (See Analysts’ Top Stocks on TipRanks)

Great Cash Flow Visibility 

One of Lockheed’s most attractive characteristics, in my opinion, is the company’s dependable cash flow visibility.

Governments internationally place bulky orders and sign multi-year supply contracts with Lockheed, so the defense behemoth highlights a substantial backlog of future deliveries. As a result, its future cash flows and potential profitability are highly predictable. The company’s most recent results once again proved that.

Lockheed ended Q3 with a backlog worth $134.8 billion. Based on the company’s ongoing delivery rate, it is positioned to enjoy secured revenues amounting to a little over two years’ worth of sales.

Furthermore, since Lockheed’s revenues are governmentally sourced, the company faces little to no counterparty risk. After, all Uncle Sam’s pockets are quite deep.

Sovereign nations are unlikely to default on their payable contracts or miss on their scheduled payments since they can always increase taxes or print some more cash in today’s fashion. For context, the U.S. government is the company’s largest customer, comprising 74% of Lockheed’s total revenues (based on last year’s total sales).

Additionally, the company keeps growing its backlog by winning new multi-year contracts over time. For instance, the company was recently awarded a $584.8 million cost-plus-incentive-fee modification to a previously awarded contract to support the F-35 aircraft for the Air Force, Marine Corps, Navy, and non-U.S. Department of Defense participants. The contract is expected to run through April 2026. Based on the above, I remain confident regarding the company’s medium-term cash flow health.

Dividend Growth Potential 

As a result of Lockheed’s fantastic cash flow visibility, the company has managed to reward its shareholders with very consistent returns over the years.

Besides its ongoing stock buybacks, Lockheed Martin features a 20-year track record of sequential annual dividend hikes. The latest quarterly dividend increase was 7.7%, while Lockheed’s five-year dividend per share CAGR sits at 9.5%.

In my opinion, such dividend growth is quite impressive for a mature company like Lockheed and should certainly ease shareholder fears following management’s strong confidence as we advance.

The payout ratio stands at 39.4% based on Lockheed’s next year’s expected EPS, while EPS itself should keep growing boosted by buybacks, suggesting that bold dividend hikes are to remain going forward. Combined with the stock’s forward P/E near multi-year-low levels at just 12.8, Lockheed’s investment case is quite compelling, in my view.

Wall Street’s Take

Turning to Wall Street, Lockheed Martin has a Moderate Buy consensus rating based on three Buys and seven Holds assigned in the past three months.

At $381.80, the average Lockheed Martin price target implies 10.4% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

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