Top Picks 2021: Lockheed Martin (LMT)

01/13/2021 5:00 am EST

Focus: INDUSTRIALS

Prakash Kolli

Founder and Author, Dividend Power

Lockheed Martin (LMT) is my top pick in aerospace & defense. The company is the world’s largest aerospace & defense contractor based on revenue, notes income specialist Prakash Kolli, editor of Dividend Power.

About 60% of the company’s revenues comes from the U.S. Department of Defense, with other U.S. government agencies contributing roughly 10% and international clients making up the remainder.

The company consists of four segments: Aeronautics (~40% sales) — which produces military aircraft; Rotary and Mission Systems (~26% sales) — which houses combat ships, naval electronics and helicopters; Missiles and Fire Control (~16% sales); and Space Systems (~17% sales) — which produces satellites.

Lockheed Martin is benefitting from robust demand from the F-35 Joint Strike Fighter. The F-35 is arguably the world’s most advanced stealth fighter. The U.S. DoD plans to buy 2,456 F-35s for the Air Force, Navy, and Marines through 2044.

The total count is higher as allied nations are also purchasing the aircraft. With a flyaway cost of about $80+ million depending on the variant and the possibility of modernization and sustainment revenue, the stealth fighter will drive revenue and sales growth for many years to come.

The demand for Lockheed Martin’s products extends to beyond the F-35. The total backlog is at a record of over ~$150 billion. Other platforms include the F-16, F-22, C-130, Seahawk, Blackhawk, missiles, satellites, and naval electronics. Lockheed Martin recently announced the acquisition of Aerojet Rocketdyne (AJRD) to reinforce its market leadership in space and hypersonics.

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Lockheed Martin has been generating strong revenue and earnings growth. The company has beaten estimates for the past six quarters. In the past five years earnings growth has averaged about 14% annually.

Dividends are growing at nearly 10% per year over the past decade. Lockheed Martin has raised the dividend for 18 consecutive years. The current payout ratio is about 42% leaving room for future increases.

On negative note the company’s outlook for 2021 was weaker than expected but is still expecting growth of about 3%. That said, initial guidance may be low. Lockheed raised guidance in 2020 from lower initial guidance.

The stock is undervalued trading at a price-to-earnings ratio of about 14.5X compared to 16.5X over the past decade. The current yield is about 2.9% and higher than its 5-year trailing average. I view the stock as a long-term buy.

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