Buybacks -- they're back!

Already this year, we've seen high-profile buyback announcements at CVS Caremark, Hewlett-Packard, and Tyco -- and it doesn't stop there. Hounded by Pentagon cost-cutters, and pounded by retail investors, Northrop Grumman (NYSE: NOC) announced a $2 billion share repurchase in June. Now rival Lockheed Martin (NYSE: LMT) has done Northrop one better, announcing a $3 billion buyback this week.

Investors seem pleased with the plan, painting Lockheed's ticker green today, even as the rest of the market is bleeding red. But is now really the best time for Lockheed to double down on itself? As in the past, our analysis boils down to two basic questions:

Can it pay?
Easily. With $3.4 billion in its cash kitty, Lockheed could buy back its whole repurchase authorization tomorrow if it wished. And while the company carries $5 billion in debt, debt is cheap right now. (Ask IBM (NYSE: IBM) and Microsoft (Nasdaq: MSFT), which are scoring historically low 1%-or-less yields on their debt offerings.)

Thus, there's no pressing need to earmark cash for paying down debt -- especially since Lockheed's throwing off new cash at the rate of $2 billion a year.

Should it pay?
It depends. Yesterday I looked at Lockheed from the perspective of P/E ratios, and how other large, dividend-paying companies are being priced -- and concluded that the stock looks attractive. However, in a consolidating defense industry, wracked by fears of a defense-spending slowdown, its peers might offer even better values:

Company

P/E

Price-to-Free Cash Flow

Projected Growth Rate

L-3 Communications (NYSE: LLL) 8.9 6.2 8.2%
Northrop 9.0 17.8 11%
Lockheed Martin 9.7 12.9 8.1%
General Dynamics (NYSE: GD) 10.3 10.2 7.5%
Boeing (NYSE: BA) 15.4 12.7 9%

Don't look up, look down
From a P/E standpoint, Lockheed looks cheaper than Boeing or General Dynamics, and produces better cashflow than Northrop. From an individual investor's point of view, the company's strong dividend yield is certainly attractive, and to me, this makes Lockheed Martin a good starting point -- a core holding, if you will. That said, the stock's not quite as cheap as smaller rival L-3 Communications, and I'll bet with just a little effort, you could find even more defense companies out there selling even more cheaply.