Why Future Defense Cuts Will Dent, Not Derail, Lockheed Martin

Lockheed Martin (NYSE: LMT  ) is a great income investment. The company just raised its dividend by 15% and has a dividend yield of 4.95%. But Lockheed has been in the news a lot lately, and not necessarily for the right reasons.

The Pentagon has been public with its frustration about the high cost of Lockheed's new F-35 fighter plane, with Air Force Maj. Gen. Christopher Bogdan saying the relationship between the defense contractor and the U.S. government is "the worst I've ever seen." If that weren't enough, the looming clouds from a Department of Defense budget cut could threaten many of the company's jobs.

Lockheed said thousands of its workers may be laid off because of the defense cuts, but then it took that announcement back  after further talks with the White House Office of Management and Budget and the Defense Budget Committee. Regardless, if the planned cuts take place at the beginning of January, as they're scheduled to, about $500 billion will be cut from defense spending over the next 10 years. To put this in perspective for investors, Lockheed Martin gets about 83% of its revenue  from defense contracts. So this is big deal for Lockheed. 

But not all is lost.

Dividends are flying high
Despite all the talk of the fiscal cliff and sequestration, Lockheed Martin has raised its dividend by double digits for the past 10 years in a row .

Lockheed could have cut back its dividend this year, or at least not raised it, but it chose not to. With a slow economy and defense spending cuts on the horizon, no one would have blamed the company. Lockheed Chairman and CEO Bob Stevens said that even in an "uncertain environment," Lockheed was meeting commitments to customers and increasing operational efficiency.

By raising dividends during a tumultuous time, Lockheed sent a strong message to investors that it's going to do what it takes to stay profitable ­-- or pay dividends trying.

Some turbulence ahead
An increase in dividends doesn't mean Lockheed will be sitting pretty over the next six months, though. The fate of employees at Lockheed, and other government contractors such as Boeing (NYSE: BA  ) and Raytheon (NYSE: RTN  ) , is far from stable. But even if the budget cuts do come, they could very well be pushed back to a later date, something Congress specializes in. In the meantime, Lockheed may have some extra time to evaluate operations and make contingency plans. 

Investors should stay grounded
For any investor, talk that Lockheed Martin is looking at layoffs and cuts to potential contracts can be a little unnerving. But keep in mind these are temporary setbacks for a staple of the defense and aerospace industry.

If the budget cuts do play out in January, about $55 billion will be cut from next year's defense budget. But the U.S. will still spend more on defense in 2013 than we did in 2006, during the height of the Iraq war , according to CNN Money.

Here's a chart to keep these budget cuts in perspective:


Source: Statista.

Investors should consider the long-term stability of Lockheed, with its wide range of aircraft, cyber security products, and drone technology. The next six months to a year may bring some unwanted news for investors, but don't expect it to take Lockheed, the government's biggest defense contractor, completely out of the sky.

Although Lockheed Martin has a high dividend, it's certainly not the only one. If you're looking for some long-term investing ideas, let me invite you to read the Fool's brand-new special report: "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so just click here and get your copy today.

Fool contributor Chris Neiger holds no positions in the companies mentioned above. The Motley Fool owns shares of Lockheed Martin and Raytheon. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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