Conflicts seem to be breaking out around the globe at a much more rapid pace than normal. Geopolitical tensions continue to run high with governments battling against negative economic forces and, in some cases, armed battles.
Normally, this would be a time to run away from the stock market and straight into gold. While holding some gold in your portfolio (as a crisis hedge) right now is not a bad idea, the thought of abandoning the stock market altogether is a bit impetuous.
To the contrary, if one were to pick any sector of the markets to outperform in times like these, it would be the defense sector. Drilling down from there, when one thinks of defense contractors, the first one that comes to mind is Lockheed Martin (NYSE:LMT).
Arguably the most well-known and established conglomerate of its kind in the world, LMT is a powerhouse when it comes to intelligence solutions and military/defense systems. Founded in 1909 and headquartered in Bethesda, Maryland, LMT is synonymous with the development of military weaponry and information technology.
Right now, given the tensions at home and abroad, the likely winner of any armed conflict is not simply the one with the most jets, bombs and tanks, but the company supplying these items. With that thought in mind, when trying to identify the largest beneficiary of planned military combat, LMT stands out as a business you want to own.
LMT is a solid company that knows how to return capital to its rightful owners. Management handles the company's finances as pedantically as one would expect from a high-tech aeronautics and missile defense systems architect. It is a cash cow that diverts its excess profits back into the pockets of its shareholders through dividends and substantial share buybacks.
While not dirt cheap, LMT has the benefit of big current income and a steady stream of cash flow to keep your money safe going forward. Plus, should the world enter a new stage of red-level military crisis, you can at least feel a bit safer knowing you own the goliath of weapon systems engineering.
Now, let's get to the specifics…
It is hard to find undervalued firms in the U.S. equities market today that are quality companies. LMT, while not a steal, is certainly not expensive. In our opinion, at current prices, you are paying a fair value for such a well-run business operating inside an extremely complex and politically heated industry.
What jumps out at us first, and what we like the most about LMT, is that it yields a solid 3%+. Also, management has a long history of raising dividends, so you are paying a bit of a premium for those future benefits as well.
As far as the safety of those dividend payments, LMT mints cash. It generated over $4.9 billion in Cash Flow over the past year alone. The dividend represents just 33.8% of this figure. Plus, CapEx is stable, making Free Cash Flow quite attractive at $4.1 billion over the same twelve-month period.
Additionally, future prospects for LMT look positive. Numerous project commitments are filling the pipeline for the firm, such as the F-35 Program, which will see the development of the "the most advanced 5th generation fighter the world has ever seen," according to Marillyn A. Hewson, LMT CEO and President.
War is good business for LMT and the world doesn't seem to be short on conflict these days. LMT currently trades at a reasonable forward P/E ratio of 14.51.
(Below based on trailing twelve months of quarterly SEC filings)
Gross Profit Margin: 10.3%
Net Profit Margin: 7.1%
Return on Equity: 73.7%
Dividend Yield: 3.1%
Stockholder Yield: 13.3%
Price-to-Cash Flow: 10.99
Current Ratio: 1.17
Enterprise Value/EBITDA: 9.72
LMT employs over 115,000 full-time workers and has been in business for over 105 years. The company operates around its five core segments:
2) Information Systems & Global Solutions;
3) Missiles & Fire Controls;
4) Missions Systems & Training; and
5) Space Systems.
When the U.S. government needs sophisticated military weaponry and advanced technological systems, it calls Lockheed Martin. LMT is of the main reasons that the United States military is light-years ahead of any other country on the planet. For better or for worse, LMT helps develop the systems that are relied upon by our leaders to eliminate physical threats of military action against our nation and our troops.
A glimpse at the financial data proves that LMT is a quality company. With a monster Return on Equity of 73.7% and a Stockholder Yield of 13.3%, you can be certain management is looking out for its shareholders.
Over the past twelve months, LMT has zero net-borrowing activity and has bought back in excess of $1.4 billion of stock. Top that off with a 3.1% (-ttm) dividend yield and you have yourself a well-run business.
The risk factors here are actually quite unusual. For most typical companies, the thought of war or military conflict around the globe would be cause for fear and investors' urge to dump shares. However, with LMT, you are actually somewhat hedging yourself against these events. Should tensions escalate further and conflict become increasingly "hot," then LMT would likely be called upon to provide more of its products and services.
It just so happens that LMT's products and services are bombs, fighter jets and advanced weapons control systems. If world peace suddenly broke out around the globe, then LMT's future projects might look dim. However, this is a very unlikely scenario.
The other risk factor here is not as much external, but just an internal awareness of LMT's financials. Given that it operates in a highly capital-intensive industry, LMT carries a significant amount of debt related to its equity. Currently, its D/E ratio stands at 7.62.
Also, should capital expenditures rise, it could weigh down free cash flow. However, we feel that there is enough of a cushion in place between cash flows and dividend payouts that it should not materially impact the current dividend. The payout ratio of cash flow over the past twelve months was 33.8%. This leaves plenty of room for continued dividend growth should things take a favorable course of action.
If you want or need current income and like the prospects of future dividend growth along with the possibility of capital gains through share price appreciation (and c'mon, who doesn't?), then LMT is a stock you should consider owning today.
It is a quality business that has a solid track record of returning cash to its shareholders. Plus, since war is the company's primary revenue generator, it acts a crisis hedge to global conflict. Get on board with LMT today and start collecting a solid 3%+ dividend yield.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.