Lockheed Martin (NYSE:LMT) is the largest defense contractor in the world by sales (Boeing (NYSE:BA) is second with arms sales of $31.4 billion to Lockheed Martin's $35.7 billion). 82% of sales originate from the U.S. federal government, particularly the Department of Defense (DOD). Another 17% comes from foreign aligned governments, and only 1% come from the private sector. The current company was formed by the 1995 merger of Lockheed, historically a defense aerospace company, and Martin Marietta, who was known for their space systems.
The remnants of the mega-merger can be seen in Lockheed Martin's four operating segments as described in the company's 2011 Annual Report. Aeronautics (31% of sales, 31% of profits) makes and maintains some of the well-known military jets and transport planes, such as the F-35, F-16, F-22, and C-130J. Lockheed has a long history making fighter and stealth jets, dating back to famous planes like the SR-71 Blackbird and F-117 Nighthawk.
Space Systems (18% of sales, 19% of profits) is the "Martin" part, making satellites, space-based missile systems, and space transports. Electronic Systems (31% of sales, 34% profits) makes missile systems, naval sensor systems, electronic spy equipment, etc. Finally, Information Systems & Global Services (IS&GS) (20% of sales, 17% profits) is engaged in general information technology activities for various departments within the government.
Investment in Lockheed Martin is a defensive play in more ways than one. The company is one of the few major government contractors, with a long history, significant trust, massive scale (in a limited market), and accrued experience that simply cannot be duplicated by potential competitors, giving the company a pretty wide economic moat. Additionally, defense spending is largely protected from wild economic swings, as witnessed by net growth in the defense budget over the past few years, despite a major draw-down in Iraq. Fast moves in technology have required continued investment in upgrading military equipment. In short, Lockheed is a not a stock that is going to give you a 100% one-year gain, nor is it likely to lose your shirt for you. The company was founded in 1912.
The question of Lockheed Martin's immense debt
In contrast to an excellent cash flow statement, with a FCF (free cash flow) of $3.44 billion ($1.095 million expended on dividends paid + $2.465 million expended on share repurchases), Lockheed Martin's balance sheet looks scary. Total equity has shrunk from $9.805 million to $1.001 million since 2007, due to constant readjustments to Accrued pension liabilities which are negatively impacted by falling interest rates and falling general stock price levels. More on this complicated accounting problem in this article.
Amazing dividend growth at Lockheed Martin - a shareholder friendly company
I purchased LMT on December 6 2011 for precisely $77.80. I sold on March 20 2012 for $88.80. I sold only because of certain unpredictable circumstances in my life. It is my usual modus operandi never to sell after I buy a stock. I treat it as money lost, my unyielding stance rewarded only by dividend payments. My personal experience is that I would have been a lot richer if I had never sold a single stock.
Now there's gnashing of teeth when I see this same stock at $92.96 and rising dividend from $1.00 to $1.15 per year. All considering, I would buy this stock even at these levels, had I got the money, but I would make sure that it does not exceed 5% of my portfolio due to the high levels of debt mentioned above, as well as uncertainties related to global and US political and fiscal situations.