THEockheed Martin Corporation (LMT), one of the world’s largest aerospace and defense contractors, has apparently struggled in recent times. At least as far as the company’s shares are concerned, anyway, which have fallen behind the overall market and are currently trading around 20% lower than last year’s high.
While the market has likely turned away from defense stocks due to future budget fears, dragging Lockheed down, the company’s cash flow remains strong with its backlog at solid levels. Additionally, in the midst of the stock decline, the stock is offering an above-average return of 3.3%, which with ongoing redemptions offers fantastic tangible returns at the stock’s current valuation.
In my opinion, quality companies like Lockheed rarely go on sale. With the outlook for positive earnings growth ahead, in my opinion, stocks present a profitable opportunity at their current levels. Therefore, I remain optimistic about Lockheed Martin. (See Best Analyst Stocks on TipRanks)
Excellent visibility on cash flow
One of the most attractive features of Lockheed, in my opinion, is the reliable visibility of the company’s cash flow.
International governments are placing large orders and signing multi-year supply contracts with Lockheed, with the defense giant highlighting a substantial backlog of future deliveries. Therefore, its future cash flows and potential profitability are highly predictable. The company’s most recent results prove it once again.
Lockheed ended the third quarter with an order backlog of $ 134.8 billion. Based on the company’s continued delivery pace, it is positioned to benefit from secure revenues amounting to just over two years of revenue.
Additionally, since Lockheed’s revenues are government-sourced, the company faces little or no counterparty risk. After that, all of Uncle Sam’s pockets are pretty deep.
Sovereign countries are unlikely to default on their payable contracts or miss their scheduled payments, as they can always raise taxes or print more money in the current way. For context, the U.S. government is the company’s biggest customer, accounting for 74% of Lockheed’s total revenue (based on last year’s total sales).
In addition, the company continues to increase its order book by winning new multi-year contracts over time. For example, the company was recently awarded a $ 584.8 million change in cost plus incentive fees to a contract previously awarded to support the F-35 aircraft for Air Force participants, the Marine Corps, the Navy and the non-US Department of Defense. The contract is expected to last until April 2026. Based on the above, I remain confident in the health of the company’s medium-term cash flow.
Potential for dividend growth
With Lockheed’s fantastic cash flow visibility, the company has managed to reward its shareholders with very consistent returns over the years.
In addition to its ongoing share buybacks, Lockheed Martin has a 20-year history of sequential annual dividend increases. The latest quarterly dividend increase was 7.7%, while Lockheed’s five-year dividend per share CAGR stands at 9.5%.
In my opinion, such dividend growth is pretty impressive for a mature company like Lockheed and should certainly allay shareholder fears following strong management confidence as we move forward.
The payout ratio stands at 39.4% based on Lockheed’s expected EPS next year, while EPS itself is expected to continue growing through buybacks, suggesting bold dividend hikes will go continue. Combined with the stock futures P / E near its multi-year low at just 12.8, Lockheed’s investment record is pretty compelling, in my opinion.
The Taking of Wall Street
When it comes to Wall Street, Lockheed Martin has a moderate buy consensus rating based on three awarded buys and seven holds in the past three months.
At $ 381.80, Lockheed Martin’s average price target implies an upside potential of 10.4%.
Disclosure: At the time of publication, Nikolaos Sismanis does not have a position in any of the titles mentioned in this article.
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