Lockheed Martin: Get Defensive With Defense Stocks

Key Points

• Defense stocks like Lockheed Martin are attractive choices for risk-averse income investors. 
• Lockheed Martin offers some insulation from inflation. 
• Shares of LMT are the highest yielding in the group and come with a robust buyback plan as well. 

Defense stocks like Lockheed Martin (NYSE: LMT), stocks related to national defense, not defensive stocks, are beginning to look more and more attractive. Not only is there a lingering conflict in Ukraine to whittle down global stockpiles of arms and ammunition but the sector provides some defensive qualities as well. Not only are their government contracts to support the underlying businesses but those same contracts provide a high barrier to entry and insulation from inflation. Within the group, Lockheed Martin is panning out as a top choice due to its valuation and yield. The company is trading at a low 14.88X its earnings which is in line with the broad market but the lowest among big-name peers. 

Lockheed Martin Offers Value And Yield 

Raytheon Technologies (NYSE: RTX) is the closest in valuation but offers a much lower dividend. The 2.6% yield from RTX is as safe as any in the industry but nearly 50 basis points less than Lockheed Martin and Lockheed Martin also comes with a robust outlook for dividend increases. The highest-valued stocks in the group are General Dynamics (NYSE: GD) and Northrup Gruman (NYSE: NOC) and 18X and 19X their earnings but their dividends are even lower. At 2.2% and 1.5%, GD and NOC offer the lowest returns in the group although NOCs return appears to be the safest among a group of safe payouts. As for Lockheed Martin, its dividend stats are representative of the group with a 40% payout ratio, a 9% CAGR, and 19 years of consecutive distribution increases. 

The analyst's coverage of Lockheed Martin has been mixed this year but the takeaway is clear, the analysts are holding this stock and providing upward pressure for share prices. The Marketbeat.com consensus rating of Hold has held steady all year despite some recent negativity that should pass now the Q3 results are in. The stock has received 1 downgrade, 2 price target reductions, and two initiated coverages with a Peer/Underperform rating but yet the price target continues to rise. The price target is up in the 12, 3, and 1-month comparisons and it could move higher over the next quarter. 

Lockheed Martin Stock Firms On Mixed Results, Guidance 

Lockheed Martin reported a good but mixed quarter in regard to the analyst's expectations. The company reported $16.58 billion in net revenue for a gain of 3.4% over last year with strength in most segments. Aeronautics led with a gain of 7.9% followed by an 8% gain in Space, a 1.8% increase in Missiles & Fire Control, and offset by a 5% decline in Rotary & Mission Systems. The bad news is that revenue missed the analyst's consensus but by a slim 65 basis points and there is margin strength to offset the weakness. The company’s operating profit declined 5.9% versus last year due to rising costs in M&F and R&MS but the shrinkage was offset to some degree by strength in the other segments and came in better than expected. This left the adjusted EPS at $6.87 or $0.15 better than expected and only 90 bps shy of last year’s figure. 

The adjusted EPS is aided by share repurchases in the YTD period. Those amount to roughly $4 billion or about 3.5% of the market cap and there is a new $14 billion repurchase authorization worth about 13.5% of the market cap in place as well. The company is planning to buy back as much as $4 billion in shares in the current quarter, Q4, and will continue to buy shares over the next fiscal year. 

The Technical Outlook: Lockheed Martin Looks Ready To Take Flight 

The price action in Lockheed Martin has been mixed over the last year but it is showing clear signs of support at the $395 level. Because price action is moving higher in the wake of the Q3 results, it looks like a rebound is brewing. If the market follows through on this signal and holds true to form, the stock could rise up into the $420 to $440 range with ease. If the market gains some momentum it could move higher. If not, this stock could remain near current lows until some other news comes out.