Lockheed Martin (LMT) is a global leader in security and aerospace. The company produces aircraft, drones, missile defense systems, and many other mission-critical products from research and development through design, production, and implementation.
Lockheed Martin also operates a Space segment that offers satellites and transport systems, among other services. The U.S. and allied governments are its primary customers.
After a lackluster 2021, the stock has seen a resurgence lately as defense stocks have come into focus amid the Russian invasion of Ukraine.
I am bullish on Lockheed Martin stock.
Reasons for Optimism
There are two notable reasons for investors to consider Lockheed Martin stock at this time. First, the Russian invasion of Ukraine has put Western nations, especially the 30 NATO members, on high alert.
Already, countries like Germany have announced plans to increase defense spending. The German government has pledged to increase spending to more than 2% of its GDP. This could include purchasing the F-35 fighter jets that Lockheed Martin produces. Other countries will likely follow suit.
On the U.S. side, defense spending is typically robust. According to the Department of Defense 2021 budget, defense spending was well over $700 billion in 2021, more than 3% of GDP, and Lockheed Martin was again the largest recipient of defense contracts. The latest tension with Russia will likely have lawmakers calling for even more spending shortly.
The second compelling reason for Lockheed Martin stock to outperform is the state of the economy and stock market. Inflation reached 7.5% in January of 2022, the highest in 40 years.
This has caused investors to seek shelter in stable industries. When there is market uncertainty, investors often flock to sectors like consumer staples, utilities, treasury bills, and defense contractors.
These investments typically offer secure revenue streams, resistant businesses, reasonable valuations, and dividends. Lockheed Martin embodies each of these.
Dividend Growth Investing
Lockheed Martin is a terrific dividend growth stock. The LMT dividend has grown annually for the last 20 years.
It now stands at $2.80 quarterly and yields nearly 2.4%. The best thing about a dividend growth stock is that as the dividend rises each year, the long-term investor’s effective yield also rises.
For instance, during the calendar year 2018, the stock traded as high as $360 and finished at $261.84. Had an investor purchased the stock at its $360 high, the investor’s effective yield would now be over 3%.
A shareholder who bought the stock at the end of 2018 would have a current effective yield of over 4%.
As the dividend continues to rise, an investor’s effective yield will also increase. This is the essence of dividend growth investing.
By the Numbers
Lockheed Martin’s sales have been rising for several years. In fiscal 2021, the company pulled in $67 billion in top-line revenue and $6.3 billion in net income.
Net income was down slightly from 2020. Diluted earnings-per-share (EPS) for 2021 came in at $22.76, also down from $24.30 in 2020.
The slight downturn in earnings should not affect the company’s ability to pay or increase the dividend. Lockheed paid out $2.9 billion in dividends in 2021. This is well under the company’s net income and cash produced from operations.
Wall Street’s Take
Wall Street analysts are only moderately bullish on Lockheed Martin stock.
Analysts have a Moderate Buy consensus rating based on six Buys, seven Holds, and no Sell ratings. Given the recent rise in military tensions, it is likely that analysts will release more bullish ratings soon.
The average Lockheed Martin price target of $433.85 implies 1.5% downside potential.
Conclusion
Macroeconomic factors make companies like Lockheed Martin intelligent and safe investments. The dividend is safe and growing, and cash flow is strong.
The company also supports shareholders through stock buybacks. In addition, the company has the most desirable customer in the world: the U.S. government.
Given the rising tensions in the world, military budgets in other countries will also likely increase. These are all factors that make Lockheed Martin a solid pick at this time.
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