Pentagon Math: Buying 15% Fewer Fighter Jets Will Cost Us 68% More

F-35A Lightning II. Photo: Lockheed Martin.

Only at the U.S. Department of Defense does this kind of math make sense.

Last weekend, Bloomberg reported that the Pentagon has rolled back plans to purchase 2,852 Lockheed Martin (NYSE: LMT  ) F-35 fighter jets, and now anticipates buying only 2,443 planes -- a 15% reduction in force. Despite getting fewer planes, however, the Pentagon expects to pay 68% more for its jet fighter fleet than Lockheed originally quoted it -- $391.2 billion.

What is the F-35?
According to former Chairman of the Joint Chiefs Admiral Mike Mullen, Lockheed Martin's F-35 is probably the last manned fighter jet model America will ever build. If all goes according to plan, we may never need to build another.

According to U.S. Marine Corps Lt. Gen. Robert Schmidle, the Mach 1.6 fighter jet will control the skies, invisible to enemy radars and able to detect and destroy even the most advanced stealth fighters being built by other nations at "considerably longer distances" than those opponents could engage the F-35. Lockheed designed the plane to replace multiple classes of combat aircraft, including Lockheed's own F-16 Fighting Falcon fighter jet, Boeing's (NYSE: BA  ) F-15 Eagle, F/A-18 Hornet, and AV-8B Harrier jump jet, and even the tank-busting A-10 Warthog, with a single "do-it-all" weapons platform.

Lockheed Martin's F-16s -- exiting, stage left. Photo: Lockheed Martin.

The planned replacement of so many U.S. Air Force, Marine Corps, and Navy jets with just one plane explains the (still) huge size of the Pentagon's planned F-35 purchases. It explains why, once the costs of maintaining and operating the plane over the next 55 years are added to the cost of merely buying the planes, the F-35 program is expected to cost U.S. taxpayers some $1.1 trillion over its 60-year lifespan.

Fighting multiple headwinds
Faced with steep and rising costs, tightened defense budgets in Washington, and a recent 60 Minutes expose that blasted production and quality-control problems with the plane, the Pentagon is throttling back on the F-35, and slowing its rate of planned purchases.

Specifically, according to Bloomberg, the Pentagon will buy only 34 units of the F-35 in fiscal 2015 -- 26 F-35A fighters for the U.S. Air Force, six F-35B short-takeoff/vertical-landing jets for the Marine Corps, and a pair of F-35C carrier-versions for the Navy.

This is five planes more than Lockheed sold the military in fiscal 2014. But it's also eight planes fewer than Lockheed had hoped the Pentagon would buy.

What it means to investors
So ... bad news?

Not necessarily. On one hand, an eight-plane deficit will mean about $800 million less in revenues for Lockheed Martin than the company had hoped to collect next year. But for Lockheed Martin, which did $45.4 billion in revenues last year, that's still less than a 2% reduction in revs.

More important for Lockheed Martin is that the military remains committed to the F-35 program. As Air Force Lt. Gen. Chris Bogdan told 60 Minutes on Sunday, there's no "scenario where we're walking back away from this program." The Pentagon will just take a little longer with its buying, giving Lockheed more time to get the bugs worked out of the software, and kinks worked out of the production line.

In the end, this should make for a higher-quality product, and a more satisfied customer when Lockheed ultimately delivers the planes the Pentagon needs. As for Lockheed Martin itself -- it's still going to get the revenues it's counting on. The Air Force is still "going to buy a lot of these airplanes" over the course of the next 60 years. Viewed from that perspective, whether the Pentagon buys eight planes more or eight planes less in 2015 really doesn't matter all that much.

One, two, three ... I count six planes in this picture. But it's the 2,437 F-35s not pictured that are really important to Lockheed Martin. Photo: Lockheed Martin

Oh, and one more thing
Did I mention that Lockheed Martin pays its shareholders a 3.3% dividend yield? Mustn't forget that bit -- because over time, generous dividend-paying stocks like Lockheed can make you rich. While they don't garner the notability of high-flying tech stocks, dividend-paying stocks are also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes torock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

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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 February 22, 2014, at 10:39 AM, cnyap wrote:

    Misleading heading. The price went up (for whatever reasons) enough so that even if volumes are reduced, the overall price is still higher.

    Strawberry prices are going to go up a lot due to the draught. Even if you buy half as many as last year, you'll pay more overall.

    Nobody can accurately predict what such a complex item will cost. Contractors don't put "oopsies" into their bids, their bids reflect a fairly trouble-free development. So they tend to underbid (the lowest bidder almost always wins).

    Also, to win (to have low cost and quick delivery as per customer's request), they are forced to have unrealistic "perfect scenario" schedules.

    Since they all do it, it's fair in terms of competition, but it's why the larger programs will almost always go over budget and be delivered late.

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Rich Smith

As a defense writer for The Motley Fool, I focus on defense and aerospace stocks. My job? Every day of the week, I'm monitoring the news, figuring out the winners and losers, and tracking down the promising companies for you to invest in. Follow me on Twitter or Facebook for the most important developments in defense & aerospace, and other great stories.

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