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This Value Stock Is Becoming Too Cheap to Ignore

By Daniel Foelber – Sep 2, 2021 at 10:33AM

Key Points

  • Consistent results support future dividend raises
  • Lockheed Martin continues to grow its top and bottom lines at relatively impressive rates
  • The stock is cheap compared to its historic valuation

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Lockheed Martin is a top high-yield dividend stock to buy now.

With the stock market hitting new all-time highs seemingly daily, an annual dividend yield of 1% or 2% may appear a bit paltry. Even top-tier dividend stocks may struggle to outperform the broader benchmarks when Wall Street is in mega-growth mode. But dividends can be a financial safety net during market corrections, generating income that investors can tap without having to sell stocks when they're down.

This dynamic makes high-yield dividend stocks a great way to balance out a portfolio -- and leading defense contractor Lockheed Martin (LMT 0.50%) is among the best of them.

A pilot takes a photo from a fighter jet cockpit.

Image source: Getty Images.

A diversified and industry-leading business

A dividend is only as good as the company paying it, and Lockheed Martin has proved it can generate stable cash flows and earnings to support its payout. Its top customer -- by far -- is the U.S. government, which accounted for 74% of 2020 sales. International customers (approved U.S. allies) accounted for another 25%, while the remaining 1% came from U.S. commercial and other customers. Lockheed's contracts operate on multiyear sales cycles, which gives its business stability. Its current project backlog amounts to a near-record $141.7 billion, which is more than two years' worth of sales. 

Its business is split into four key segments: aeronautics (military aircraft design, manufacturing, servicing, support); missiles and fire control (missiles, rocket systems, control systems, logistic services); rotary and mission systems (air and missile defense systems, control systems, communications, sensors, support systems); and space (satellites, space transportation, hypersonic missiles, defense systems). In sum, Lockheed participates in an array of government defense programs, among them the massive F-35 fighter jet program. 

Consistent results

Deep involvement in Pentagon programs. makes Lockheed dependent on Department of Defense spending. Data from the U.S. House Appropriations Committee suggests that Defense funding for fiscal 2022 will be just 1.5% above fiscal 2021 levels -- a growth rate that doesn't match recent inflation rates. Yet Lockheed has shown time and time again that it can grow its top and bottom lines at higher rates than U.S. defense spending. After initially forecasting 2021 revenue growth of just 2%, Lockheed is now guiding for around 4% top-line growth and double-digit percentage diluted EPS growth.

Metric

2021 Estimate (Midpoint of Range)

Estimated 2020-2021 Change

2020

2019-2020 Change

2019

Revenue

$68 billion

4%

$65.4 billion

9.4%

$59.8 billion

Diluted EPS

$26.85

10.5%

$24.30

10.7%

$21.95

Cash Flow From Operations

$8.9 billion or more

8.5%

$8.2 billion

12.3%

$7.3 billion

Data source: Lockheed Martin. YoY = Year over year. 

Lockheed's consistent performance underpins its value as a quality dividend stock in that it can post quality results (even during events as disruptive as the COVID-19 pandemic) and generate ample cash to support dividend payments. Earlier this year, Lockheed raised its quarterly dividend to $2.60 per share, giving it a yield of 2.9% at today's share price.

Slowing growth

The main question looming over Lockheed Martin is how it will perform in a prolonged period of stagnant defense spending. Although its backlog is large, it still needs to be replenished with more contracts sooner rather than later. And if those contracts are smaller and harder to come by, Lockheed's growth rate could decline.

Lockheed can't control how much the U.S. government spends on defense, but it can stay ahead of the curve by funding programs that Washington could support in the future. In addition to making new and improved products and upgrading legacy equipment, the company has a few exciting programs that have garnered the attention of growth investors like Cathie Wood, the CEO of Ark Invest. Lockheed Martin is the ninth-largest holding in the Ark Autonomous Technology & Robotics ETF (ARKQ 0.11%) and the sixth-largest holding in the Ark Space Exploration & Innovation ETF (ARKX). The ongoing importance of satellites for detecting incoming missile launches and the rise of hypersonic missiles are two drivers that could drive growth for Lockheed's space division.

An opportune valuation

LMT PS Ratio Chart

LMT PS Ratio data by YCharts

Lockheed's stock price has languished as its earnings have increased, which has lowered its price to earnings (P/E), price to sales (P/S), and price-to-cash-flow-from-operations (P/CFO) ratios.

LMT PE Ratio Chart

LMT PE Ratio data by YCharts

Today, all three financial metrics are below their five-year median averages. Given the company's low growth rate, the stock arguably deserves to have a lower valuation than the broader market. But a P/E ratio of 14 is bargain-bin territory for a company of Lockheed Martin's size and influence.

LMT Price to CFO Per Share (TTM) Chart

LMT Price to CFO Per Share (TTM) data by YCharts

The bottom line

Even with investments in its space division, it's unlikely that Lockheed will be a fast-growing company anytime soon, but it doesn't have to be. The investment thesis for this stock is centered around income and value, not growth. The company's track record of raising its dividend and its current low valuation means it has these two categories in spades. In today's market, it's hard to find large and stable industrial company stocks as cheap as Lockheed -- and this one comes with a dividend that yields 2.9% to boot. Income investors looking for a solid dividend stock to round out their portfolio could do well by opening a position in Lockheed Martin.

Daniel Foelber owns shares of Lockheed Martin. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Lockheed Martin Stock Quote
Lockheed Martin
LMT
$483.46 (0.50%) $2.39
ARK Autonomous Technology & Robotics ETF Stock Quote
ARK Autonomous Technology & Robotics ETF
ARKQ
$44.88 (0.11%) $0.05
ARK ETF Trust - ARK Space Exploration ETF Stock Quote
ARK ETF Trust - ARK Space Exploration ETF
ARKX
$13.18 (%)

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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