Will Lockheed Martin Help You Retire Rich?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. As part of an ongoing series, I'm looking today at 10 measures to show whether Lockheed Martin (LMT -0.20%) makes a great retirement-oriented stock.

Defense companies have been under fire for years as the threat of budget cuts at the Pentagon have hung over their heads. The recent sequestration crisis has only heightened that threat, but Lockheed Martin and its peers are taking steps to shore up their businesses and make it through the tough times. Below, we'll revisit how Lockheed Martin does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

• Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
• Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
• Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
• Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
• Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Lockheed Martin.

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Lockheed Martin last year, the company has kept its eight-point score for the third year in a row, with free cash flow shrinking but the stock's dividend streak passing the 10-year mark. The stock has managed to eke out a gain of around 5% over the past year.

Lockheed isn't alone in facing defense budget cuts, but it stands to lose a lot more than many of its peers. Its F-35 fighter jet program has been the target of scrutiny due to cost overruns and concerns about quality both in the U.S. and in Canada, and the entire strategy behind focusing U.S. military efforts on a single fighter model has been called into question, opening the door for rivals to regain their standing in the fighter arena. Boeing (BA -2.87%) has experience with its F-15 fighter and vied with Lockheed on the F-35 contract, and it's waiting in the wings for a chance to get its share of the Pentagon's overall fighter budget. Northrop Grumman (NOC -0.02%) has turned its attention to unmanned aerial vehicles lately as more budget-cut-resistant, but it could also challenge Lockheed if the F-35 loses confidence.

Even under sequestration, Lockheed has continued getting its share of defense contract work. But Lockheed has also taken steps to try to diversify beyond defense. With forays into civilian aircraft maintenance and dirigibles, as well as building liquefied natural gas tanks and water desalination technology, Lockheed hopes to build up revenue in non-defense areas to provide ballast against a catastrophic cut in defense spending.

For retirees and other conservative investors, the risks involved in the defense industry are very real and justify the low valuation that Lockheed Martin shares are fetching right now. A 5% yield is hard to pass up, but you need to be comfortable with the risks of future declines in revenue if you want to add Lockheed Martin to your retirement portfolio.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Add Lockheed Martin to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.