Defense contractors are cash machines and are some of the most reliably profitable companies in the world — and my top defense stock recommendation is Lockheed Martin (LMT), observes Tony Sagami, editor of Weiss Ratings.
Lockheed produces a wide array of military weapons, and dominates the global military aircraft space with its F-35 fleet. It manufactures a wide menu of combat fighters, satellites, warships, helicopters, and missiles.
Over the last 12 months, Lockheed Martin pulled in $64.1 billion of revenues and $9.1 billion of profits. Meanwhile, the 2023 defense budget was increased by $37 billion to $773 billion. How much of that increase will find its way into Lockheed Martin’s wallet? Lots!
The centerpiece of Lockheed's business is the F-35 Fighter, the most sophisticated military fighter ever built and generated 27% of its revenues in 2021. The F-35 is a license to print money. Roughly 2,500 of the F-35s are on backorder and at the current price of $161 million each, so we’re talking about a mountain of money.
The stock is trading for a reasonable 14.2 times earnings, 1.7 times sales, and has $1.8 billion of cash in the bank. The company is also aggressively buying back its stock. The current $6 billion share repurchase program could retire more than 6% of its outstanding shares.
Lockheed currently pays a $11.20 annual dividend, which works out to a 3% dividend yield, but if history is any guide, you can expect that dividend to increase like clockwork. The company has increased its dividend for the last 20 years in a row.
Those dividend increases have not come at the expense of growth, either. The $11.20 dividend represents a 50% dividend payout ratio, so Lockheed Martin keeps plenty of cash to fuel growth and acquisitions.
From a geopolitical point of view, it does feel like world is becoming a more dangerous place. The war in Ukraine is impacting all of Europe, China is becoming increasingly aggressive towards Taiwan, and Afghanistan is in turmoil after the U.S. exit 15 months ago. The reason to own Lockheed Martin is not to benefit from war, but that its high-tech defense is the key to preventing war.