Lockheed Martin: The Best Defense Play In 2012

| About: Lockheed Martin (LMT)

Mention "National Defense", and few associations come quicker to mind than Lockheed Martin (LMT). The company has been a leader in defense technology and equipment for decades now, and seems set to stay headed down the same road toward future horizons.

Lockheed rises and falls with national defense. Or, more relevantly, spending on national defense. And since 2012 features a budget cut in that department, Lockheed may be in for a bit of a hit. That's not to say the company is down. By all means, Lockheed remains the clear-cut leader in the defense and aerospace industry. Experts give it the thumbs up to buy if you're looking to buy into this industry.

The question then is not whether you'd want to buy Lockheed, but whether you'd want to buy any defense or aerospace stock. Either way, it's not going to be cheap. With Lockheed trading around $89.06 per share, you'll want to truthfully consider whether the investment is sage or not.

You could spend the same and buy yourself more shares of competitor Boeing (BA), but you'll run risk with them too. See, it relies just as heavily on defense spending, but is failing to stay within budget on a contract with the Air Force. Boeing is already $900 million over budget, and, at the same time, it faces stiff competition in its aeronautics output with its own European competitors.

So yes, it helps to have your competition struggling a little bit too. And maybe it's for this very reason that Lockheed was awarded a solid, $66 million follow-on contract with the Missile Defense Agency. The new money continues its development of Terminal High Altitude Area Defense (THAAD) Weapon System. The contract continues Lockheed's work for five years and establishes it once again as the most advanced company in industry. Others simply can't compete in developing high-level weapon technologies like this.

THAAD is the only missile defense system of its kind ("with the operational flexibility to intercept in both the endo- and exo-atmospheres to provide versatile capability to the warfighter"). Keep this in mind when you consider Lockheed, as it maintains its status as one of the global leaders in technology of this kind.

But where money is coming in, it to also be leaking out. Lockheed has its own problems keeping budget with a military contract. The company is facing problems in the development of its F-35 warplanes, meant to be sold to several countries. Now, as reports have come out that planes are experiencing malfunctions, nations are reconsidering their bids and the US, along with Lockheed, are left to handle the bill.

The most recent news has been good for the F-35, as it just completed its first midair, nighttime refueling mission. Still, Boeing has jumped on the opportunity of the F-35's delay to lobby Congress to invest in its own planes, the Super Hornet, a contract that could be worth up to $2.5billion.

I'd be remiss if I didn't mention the best part of Lockheed stock, though. Lockheed pays high dividends. It has paid out at $1 per share for the previous two quarters, more than double what Boeing offers. Lockheed also features an EPS average of $7.80, which is also substantially higher than its biggest competitor, Boeing. So that certainly makes the stock a good one to own.

A good stock indeed, especially when its dividend yield is 4.50%. That's almost double Boeing and well ahead of any other competitor. Of course, who knows how long Lockheed can keep this rate at, especially with more calls for budget cuts in the defense industry coming.

So the choice is whether you can put up with the industry. Because it's not just Lockheed and Boeing enduring the roller coaster that is the defense industry, other companies are too. Take Raytheon (RTN), makers of the Patriot missile system. Its stock, too, rises and falls with industry news, and it sells a much pricier product than Lockheed's missile defense systems. It's also one that is not always as in demand. For a company can always sell defense, but it cannot always sell aggression.

Other competitors, like Northrop Grumman (NOC) have fared well; Northrop scoops up cheaper government contracts than Lockheed and Boeing. Northrop recently partnered with Lockheed to help its price keep level so far in 2012. It'd be nice to keep such mutually beneficial partnerships alive, but sooner or later the two firms will compete once again for a contract.

Also competing in those contracts, especially for those smaller contracts is General Dynamic (GD), whose growth has been substantial enough to be considered one of the top five best growth stocks that Warren Buffett owns. The company expects nearly a 10% growth by the end of 2012. However, just as Lockheed, General Dynamic may be just one large failed project away from plummeting.

Maybe these smaller (and take the word "smaller" with a bit of asterisk, as they are enormous companies, just not as enormous as Lockheed) companies are the wave of the future as the government contractors look to cut costs to reflect budget cuts. If this is so, however, you can expect Lockheed to adapt. It will remain a leader in an industry full of ups and downs.

Unfortunately, though, the ups and downs are an inescapable part of the defense industry, especially when the company deals with the newest and most advanced technologies. You are going to have large investments and you are going to have failures. What you do know is that if the US continues to keep their defense budget high, and finance research and development for new weapon technologies, Lockheed will get contracts. And perhaps that's enough reason to buy Lockheed Martin stock for a specific purpose, like retirement.

So, again, the question isn't whether you want to buy Lockheed stock, but, with more budget cuts surely coming, whether you want to invest in defense technology stocks at all.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.