Ever since the sequester and the concept of defense cuts became reality, the financial media has been gripped with fear over the fate of the U.S. defense industry. Many pundits theorized that punishing budget cuts would soon bring the entire industry to its knees. So far, such panic has yet to be substantiated. Instead, defense giant Lockheed Martin (LMT 1.31%) has continued churning out huge free cash flow quarter after quarter, thanks to the ongoing success of its flagship programs, including its F-35 jets.
Sequester? What sequester?
Despite analysts' sequester-fueled fears, Lockheed Martin has successfully secured a number of lucrative projects, including two recently announced F-35 contracts with the Pentagon. All told, the Pentagon will purchase 71 F-35 jets for a tidy $7.8 billion.
It's true that Lockheed Martin's sales growth has plateaued this year. At the same time, the company wisely cut costs where it could, in anticipation of a slowdown. Its efforts have worked, and as a result, the company's profitability has actually increased so far in 2013, despite the backdrop of defense budget constraints. Lockheed Martin's diluted earnings per share have grown 11% and 13% in the second quarter and through the first half of 2013, respectively, year over year.
Lockheed Martin's ability to execute even in a tough operating climate for defense companies is a credit to management, and the main reason why the company stands above its competition.
Other defense firms have performed admirably this year, but they aren't matching Lockheed Martin's level of success. Northrop Grumman (NOC 0.91%) has grown diluted EPS by 6% through the first six months of the year, a strong performance but one that lacks Lockheed Martin's. Ditto for industry peer Raytheon (RTN +0.00%), which has seen its diluted EPS rise 9.5% through the first half of 2013.
While these results are still strong in their own right, it's clear that Lockheed Martin is navigating the sequester better than its rivals, and its new $7.8 billion in announced Pentagon contracts will only grease the wheels for future outperformance.
Lockheed has shareholder returns squarely in its cross-hairs
Nowhere is Lockheed Martin's success more evident than in the massive amounts of cash it's returning to investors. Within the defense industry, there's simply no matching Lockheed's impressive dividend increases and share buybacks.
Lockheed recently upped its dividend by 16%, representing its 11th consecutive year of a double-digit dividend increase. Moreover, the company also recently added a hefty $3 billion to its existing share repurchase authorization.
To be fair, Northrop Grumman and Raytheon are also committed to returning cash to shareholders, but they haven't kept up with Lockheed Martin's astonishing level of shareholder-friendliness. Northrop Grumman raised its payout by 11% earlier this year, but only yields 2.5%. Meanwhile, Raytheon increased its dividend 10% this year -- an equally nice bump upward as Northrop Grumman's -- but at recent levels, Raytheon's stock still yields just 2.8%.
Put simply, Lockheed Martin is a cash cow. The company's 4% dividend is fantastic on a stand-alone basis and in comparison to its industry peers, but it becomes even more attractive when you consider its track record of providing regular double-digit percentage increases to its payouts. To be exact, Lockheed has grown its dividend by 18.5% compounded annually over the past five years.
Investors may be understandably questioning how a defense contractor can succeed to such a degree in light of ongoing budget constraints. But given the world's near-perpetual geopolitical instability, governments are now constantly presented with new security challenges. As a result, if you're looking to defend your portfolio against the ravages of inflation or the volatile swings of the stock market, consider Lockheed Martin.
