Avoid Lockheed Martin Despite Cheap Valuation And High Yield

Jul.24.12 | About: Lockheed Martin (LMT)

Shares of global security and aerospace company Lockheed Martin Corp (LMT) are up more than 62% over the past five years.

LMT ChartClick to enlarge
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LMT data by YCharts

Cheap Valuation

Despite the move higher in the stock, valuation remains cheap for LMT. Currently, LMT is trading at just 10.52 times trailing earnings. As shown by the chart below, this valuation is close to an all-time low for LMT.

LMT PE Ratio ChartClick to enlarge
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LMT PE Ratio data by YCharts

Dividend Yield

Currently, LMT yields 4.56%. By any measure this is a good yield. It is also worth noting that LMT pays out just less than 50% of earnings, so it is likely that the company will raise the dividend at some point. As shown by the quarterly dividend chart below, LMT has had a strong history of consistently raising the dividend over time.

LMT Dividend ChartClick to enlarge
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LMT Dividend data by YCharts

Defense Spending Cuts

I believe defense spending cuts are inevitable as long as no major war breaks out. Given the current debt situation, spending cuts must occur. While republicans would rather cut spending in other areas, defense spending is the area democrats prefer to cut. The sector would most likely have a better fate if Mitt Romney defeats President Obama in the 2012 elections as he will not impose the cuts that President Obama would support. However, I think Romney would be forced to compromise on the issue if he wants to make a major deal with the democrats to reduce the deficit. Also, a recent survey showed that voters of both parties support defense spending cuts. Defense spending cuts would be a major negative for all industry players, not just LMT. Raytheon (RTN), General Dynamics (GD), and Northrop Grumman (NOC) would all be hurt.


Despite the cheap valuation, and high dividend yield, I would avoid LMT because of the outlook for defense spending. A significant drop in defense spending would certainly be a negative for LMT. With the odds of an Obama victory now approaching 60%, I believe LMT could see some selling as the election approaches. However, given a significant pull-back, I think LMT would be a long-term buy. Eventually, defense spending will again increase.

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