The Dow Jones Industrial Average, or the Dow, is an index composed of 30 distinguished companies from the U.S. exchanges. It's widely covered and viewed as a gauge for the health of the broader U.S. stock market.
Do you want to beat the Dow? The defense and aerospace company Lockheed Martin (LMT -0.75%) has made it look easy for years.
What's the secret? Cash-gushing dividends are a crucial ingredient to Lockheed Martin's success. Will it continue?
Here is what the evidence says.
An investment in America's defense
Lockheed Martin designs and builds weapons systems for land, sea, air, space, and cyber applications. Some of its famous products include Apache and Black Hawk helicopters, the F-35 Lightning II jet, and Javelin mobile missile systems.
You can't invest directly in the United States military, but Lockheed Martin is a great alternative. The company gets over 70% of its sales from the American government. Most of that is from the Department of Defense.
As U.S. defense spending goes, as does Lockheed Martin:
US Government Defense Spending with Forecast data by YCharts
While government spending can sometimes pull back, defending America and its interests has always cost a lot, and spending has only grown with time.
Arm your portfolio with gushing dividends
Dividends are sometimes grossly underrated, so check out how impactful they've been. Lockheed Martin has outperformed the Dow on price alone. However, dividends contributed more to the stock's returns than its share price growth.
LMT Total Return Price data by YCharts
Lockheed Martin is still an excellent dividend stock today. The company has raised its dividend for 21 consecutive years. Over the past five years, the dividend has grown by an average of 8% annually. Add in the stock's current 2.7% dividend yield, and that's a solid combination over the long term.
Lockheed Martin's dividend payout ratio is just 52% today, giving management room to issue future raises. Management uses excess cash flow to repurchase shares, helping bolster earnings growth.
Is there more to come?
Lockheed Martin is well positioned for growth long into the future. The company's F-35 aircraft program has grown to over a quarter of Lockheed Martin's total sales, and there is still a lot of life left in it. The Department of Defense has roughly 450 F-35 fighter jets with plans to procure approximately 2,500 over the coming decades.
The F-35 has been scrutinized for its delays and cost overruns, but current geopolitical tensions have increased interest in the program from some of America's allies, including Germany and Canada.
These aircraft are remarkably expensive, but Lockheed's real money will come from years of maintenance and service revenue. In all, the program's estimated value is approximately $1.7 trillion. Analysts have increased their long-term growth estimates for Lockheed Martin since early 2023:
LMT EPS LT Growth Estimates data by YCharts
Meanwhile, the stock trades at a forward P/E ratio of 17, a palatable valuation for a company growing earnings at a 9% clip and paying a nearly 3% dividend yield. Patient investors willing to let Lockheed Martin compound its profits and shower them with dividends have a solid shot at continuing to get a leg up on the Dow Jones for years to come.
