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Pension Woes Lay Lockheed Low

Recessions are tough on business.

They're even tougher on employees.

But not at Lockheed Martin (NYSE: LMT  ) . Lockheed's stock got perfectly pounded after earnings, thrown for a 6.5% loss (and down nearly another 3% yesterday) despite reporting:

  • Third quarter sales growth of 5% over last year.
  • An 8% improvement in earnings per share.
  • An incredible 35% rise in operating cashflow.
  • And even a modest amount of backlog growth (0.5% from last year's third quarter). Not enough to replace the firm's booked revenue, admittedly, but any growth at all counts as a success in the context of a Pentagon budget crunch.

Lockheed's bottom line crushed Wall Street's projections -- so why is the stock losing altitude?

No good deed goes unpunished
Two words: Profits and pensions. In recent years, we've seen traditional or cash balance corporate pension plans go the way of the dodo at hi-profile corporate names like Wells Fargo (NYSE: WFC  ) , Motorola (NYSE: MOT  ) , and FedEx (NYSE: FDX  ) . Across America, companies have moved to freeze, slash contributions to, and even wash their hands entirely of their pension obligations. And as I wrote back in July, the mayhem isn't even close to being finished. According to Bank of America unit Merrill Lynch, dozens of America's industrial titans face pension funding shortfalls as this year's stock market collapse torpedoes pension fund returns, including Dow Chemical (NYSE: DOW  ) , U.S. Steel (NYSE: X  ) , and ExxonMobil (NYSE: XOM  ) . It seems no one is safe.

But while others fret, Lockheed is doing something about the problem -- and getting punished for it. Part and parcel of the earnings warning that Lockheed issued is the company's plan to shore up its pension fund. Lockheed will inject $1 billion into its fund this year, and a further $1.4 billion in 2010. Combined, the twin injections will eat up quite a bit of Lockheed's yearly cash production.

Is it worth it?
That's the real question, Fools. Wall Street doesn't seem thrilled with the idea, but personally, if I were a Lockheed Martin employee, I'd be feeling pretty darn proud of my company today. As other corporates shirk or slash their pension obligations, Lockheed's paying up in full -- and I'd argue, making a wise investment in employee satisfaction.

When you consider that even after the market's rebound, stocks are trading for some 30% to their pre-Crash highs, an investment into the pension fund today isn't a bad time to patch a hole in Lockheed's pension shortfall. Personally, I'd rather have a company contribute now and have that money grow from these lessened levels.

It just might secure the fund's future while other companies with less courage only delay the inevitable shareholder pains. Then again, at the tail end of last year, Lockheed had arguably the largest pension headache of any American company, so maybe this is just the start of Lockheed's pension pain.

Possessed of the world's first trillion-dollar warplane, Lockheed's prospects look bright. But is it the absolute best bet in defense stocks? Not necessarily. To ensure you get the best advice possible on investing in this sector, our Motley Fool Rule Breakers team is looking into options in everything from UAVs to military robots to missile defense to bulletproof soldiers. Get your 30-day free trial right here.

Fool contributor Rich Smith does not own shares of any company named above. FedEx is a Motley Fool Stock Advisor selection. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 22, 2009, at 5:31 PM, wd40s wrote:

    Great Job Lockheed, it about time a corporation showed some passion and dedication to their employee's. Yes shareholders are investors but it's the employee's who produce the profits and the performance.. Wish more companies like Dow and Exxon would show the same dedication. Employees are generally shareholders in the companies where they work.... Companies like Lockheed and Caterpillar seem to cherish their workforce...

  • Report this Comment On October 22, 2009, at 5:59 PM, valuwarrior wrote:

    I agree with TMFDitty--great corporate resposibility should be rewarded, especially when its likely to be returned to the company in future pension fund gains as the stock price recovers. Speaking of that, as a LMT investor, I have to say CRAMER is right on this one--LMT is THE screaming bargain right now in the US Defense Industry. JSF alone enjoys a bigger budget line than many LMT competitors' portfolios. Mr Gates' just-passed DoD budget says it all in B&W: Long lead items for JSF means 2011 production alone grows to 1.7 times that of 2010--and by 2015 it will growing to 5 times the 2010 level of production. Wake up Wall Street!!

  • Report this Comment On October 22, 2009, at 11:07 PM, allwoundup wrote:

    That is real nice for the employees that have a pension. Not all Lockheed employees are that fortunate, there are a lot of non-union folks that this means nothing to. I am happy that the company is still doing fine but what about all of us that are on layoff with no pension and no unemployment checks. It seems to me that with all the new awards coming from the Government there should be a callback.

  • Report this Comment On October 23, 2009, at 9:14 AM, HiDave606 wrote:

    The vast majority of Lockheed's work is for the government, and part of the overhead rate negotiated with the government in its contracts is for the pension fund. I am not 100% sure about this, but I heard while working for Lockheed, that the government requires that the company put those retirement funds in a protected place where the company will not be able to do anything with them but give them to employees who earned them by virtue of their retirement. Thus, even if the company went bankrupt, employee's retirement would be secure. Anyone know for sure?

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