All the investment community seems to care about this year are big technology stocks and the artificial intelligence (AI) "revolution." It's hard to blame them when such stocks as Nvidia are up over 220% just in 2023. There seems to be a lot of FOMO (fear of missing out) right now on Wall Street as investors try to catch a ride on the AI hype train.
If you are a contrarian investor looking for safer, income-producing stocks, investing in AI may not be for you. Luckily, there are a lot of dividend growers whose share prices are actually down this year. Defense and aerospace contractor Lockheed Martin (LMT -0.75%) fits this definition to a T, with its shares down 6% year to date. This price dislocation provides investors with an opportunity to buy a dominant and growing business at a reasonable price.
Here's why Lockheed Martin can be a foolproof dividend stock in your portfolio for years to come.
Growing backlog, new contracts
Lockheed Martin is the largest American defense contractor by revenue, with expectations to hit between $65 billion and $66 billion in 2023 sales. It has numerous operating segments but mainly plays in aerospace (fighter jets), missile systems, and the space economy.
With minimal competition for advanced military and space technology systems, Lockheed generates reliable revenue from these segments year in and year out. Its F-35 fighter jet -- while getting beaten up in the media for cost overruns -- is the most advanced fighter jet in the world and gets consistent orders from the American military and its allies (especially after the Russian invasion of Ukraine), with 126 new orders just last quarter. In the second quarter, Lockheed's backlog grew to $158 billion, up $8 billion from the end of 2022.
LMT Free Cash Flow data by YCharts
There are plenty of new contracts in the works as Lockheed thinks its business will get back to growing revenue in 2024. For example, NASA just awarded Lockheed a contract to develop a nuclear-powered spacecraft. But most important will be securing the next-generation air dominance (NGAD) contract from the U.S. government. Its only competitor for the contract is Boeing, making it a two-horse race to secure the prime defense deal.
The government is expected to spend $300 million per plane for these extremely advanced aircraft and plans to order 200 initial units for the program. That would equate to $60 billion in initial revenue, which would likely balloon to over $100 billion when you include adjacent contracts and future sales to U.S. allies.
A steady book of business and a secure position as one of the key contractors for the U.S. government keeps Lockheed Martin consistently profitable. This year, it is expected to generate $6.2 billion in free cash flow and has generated positive cash flow in each of the last 10 years.
Juicing dividends with share repurchases
Lockheed's business units generate a lot of cash. After reinvesting in research and capital expenditures, management utilizes two methods to return cash to shareholders: dividends and share repurchases.
Stock repurchases reduce a company's shares outstanding and increase how much of the company the remaining shareholders own, all else equal. Over the last 10 years, Lockheed's shares outstanding have declined by 21%.
A declining share count enables a company to grow its dividend per share without paying a nominally higher dividend payout, due to the fact that there are fewer shares. For a company such as Lockheed that also grows the amount of free cash flow it generates, management has been able to consistently grow its dividend per share, up a cumulative 156% over the last 10 years.
LMT Dividend Per Share (TTM) data by YCharts
Today, Lockheed's dividend yield is a sizable 2.7%. Shareholders who buy at these prices will get this 2.7% yield annually plus all the growth in its dividend payout in upcoming years. This makes Lockheed a great income stock for your retirement account at these prices.
