The S&P 500 Index is near its all-time high, and when a rising tide lifts the broader market, it can become hard to find stocks that are attractively valued. In addition, the average yield for the index is a painfully low 1.5% or so, which is making it difficult to find decent dividend stocks.
Lockheed Martin (NYSE:LMT), while far from a perfect investment, still offers a solid combination of value and yield. Here’s what you need to know about this defense contractor, and why you might want to buy it today.
A strong business
Lockheed Martin is a giant $100 billion market capitalization defense contractor with one main customer — the U.S. government, which provides the large majority of its revenue. However, it provides highly specialized products and services across its aeronautics (roughly 40% of 2020 sales), rotary and mission systems (25%), space (18%), missiles and fire control (17%) divisions. So as a business, it’s actually fairly diversified, even if its client list is not.
From a bigger-picture perspective, while political issues can complicate the aerospace and defense business, the truth is that military spending isn’t really optional. In any given year, the federal government may increase or decrease that spending, but it isn’t going to walk away from supporting the country’s ability to defend itself. Lockheed Martin is an integral part of that.
Moreover, many military contracts are long term in nature, creating fairly reliable income streams for the company. Even during pandemic-battered 2020, Lockheed’s revenues increased 9% with earnings up roughly 11.5%. That’s pretty impressive given the backdrop.
Rock-solid financials, rewarding results
That core business sits atop a solid foundation. The company sports a financial-debt-to-equity ratio of 0.12, and it covers its interest expenses nearly 15 times over. The company is investment-grade rated. With a balance sheet like that, Lockheed Martin should have no problems navigating turbulent times, as it proved in 2020.
One of the best examples of the company’s consistency is its dividend, which it has boosted annually for 18 years. The average annual increase over the past decade, meanwhile, was a very generous 14%. Although the most recent increase was “only” 8%, that’s still nearly three times the historical rate of inflation. In other words, Lockheed Martin’s regular payout hikes have actually increased the buying power of the dividends investors receive over the years.
At current share prices, the dividend yields roughly 2.8%. That isn’t exactly huge, but it is materially higher than what you’d get from an S&P 500 Index fund. So while dividend investors looking to maximize the income they generate might not be inspired, those with more of a dividend growth focus should still be fairly interested. The current yield, meanwhile, is fairly generous relative to its average levels over the past 25 years or so.
Not a bad deal
That brings this story to, perhaps, the most interesting aspect of Lockheed Martin today — valuation. The company’s price-to-sales-ratio is roughly 1.6, versus its five-year average of 1.7 times. Its price-to-earnings ratio of around 15 is well below the longer-term average of 23. And the price-to-cash-flow ratio comes in at 12.8, versus a five-year average of 17.1. The forward-price-to-earnings ratio, which takes into account earnings growth expectations, also paints an attractive picture at 14.1, versus an average of 18.1 over the past five years. Basically, Lockheed Martin’s stock looks relatively cheap today.
Nothing is perfect
Lockheed Martin isn’t a slam-dunk investment, but there are very few of those to be found on Wall Street at any time. For example, its business is highly concentrated around a single giant customer, and while its yield is generous compared to the market and its own history, it isn’t exactly huge on an absolute basis. And, of course, if you have philosophical objections to investing in military contractors, it’s an instant no.
However, Lockheed Martin has a fairly well-diversified business for a military contractor. It is a large and financially strong company. It pays a relatively generous and growing dividend. And it looks relatively cheap today compared to recent history. While it may not be a screaming buy, it does come out looking like a pretty good option for long-term investors right now.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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