Lockheed Martin: It's A Good Time To Be A Shareholder

Summary

• Lockheed Martin is going to return ~$9 billion to shareholders in 2022 through buybacks and dividends.
• Lockheed Martin is facing some supply chain issues that will put a drag on revenue in the short term.
• Lockheed Martin is focusing on free cash flow per share, which is extremely encouraging for shareholders.
• Lockheed Martin has increased the dividend for 20 straight years and counting.

JHVEPhoto/iStock Editorial via Getty Images

Lockheed Martin (NYSE:LMT) is the world's largest defense contractor. Countries all around the world are getting in line for their famous F-35 jet (including Canada!). The company is set to see growth over the next 9+ years as defense spending continues to accelerate. With a new focus on free cash flow per share, Lockheed Martin is focused on prioritizing investments in high-return opportunities while increasing the value of every single share through dividends and buybacks. I think this is a great stock for someone looking for some defense exposure whilst getting paid to wait for the share price growth to really come.

What Will Drive The Company?

In short, US government defense spending. This is a blessing and a curse. Looking below, we can see what the trend has looked like over the previous years, and what it looks like going forward. Lockheed Martin has just shy of 100% government exposure. What this means, is that if the government is spending, they are making money. And if the government isn't, revenues run a bit dry as well.

(Source: Statista.com)

Above, we can see the revenue of Lockheed Martin over the years, and you'll notice a fairly similar trend to the prior image. The good news here is that it is expected that government spending ramps up from here over the next 9+ years, which means we will once again see pretty stable revenue growth from Lockheed Martin.

A good chunk of their revenue (~40%) comes from the Aeronautics side of things. I'm going to focus on this for a moment, breaking down what we can expect concerning F-35 deliveries down the road. Being Canadian, I was happy to hear that early this month, Boeing's (BA) Super Hornet was eliminated as an option to replace the aging fleet. The contract is worth ~$14.8B, which includes 88 jets. The F-35 and Saab's (OTCPK:SAABF) Gripen are the only two aircraft still in contention. I for one will be shocked if they do not pick Lockheed Martin. This would be on top of the 156 jets delivered annually to the U.S. beginning 2023 and for the "foreseeable future" according to the company. As I'm sure you could imagine, with an increase in the number of jets being delivered, comes an increase in CapEx. Looking below, we can see that is exactly the case over the next few years. But with that, comes the investment return, or cash from operations. This is where all the money that the company is returning to shareholders (more on that later) is coming from. The growth from 2015 to 2025 will be fairly significant for a so-called "dividend darling".

Upon reading through the Q3 earnings transcript in preparing for this article, something interesting did catch my eye.

"...we are going to dynamically allocate capital to the highest return opportunities, prioritizing investments that lead to growing free cash flow per share. That's our new metric...."

- CEO, James Taiclet

If I were a shareholder, I would be extremely excited to hear this quote: the reason being that cash is king. More so, the mention of "per share" means that they are dedicated to increasing the value of each share, which is done through both growth and buybacks. Looking below, we can see where things stand on this front now, and where they are expected to go. This increased cash only gives Lockheed Martin increased freedoms. The company has done a phenomenal job of reducing debt over the last 5 years, and now it's time for shareholders to get rewarded for their patience. The company looks to keep leverage under 1.0x (assuming no further acquisitions) for the foreseeable future, which is a very comfortable spot to be in. Not all debt is bad debt.

How Is The Dividend?

For most investors, this is probably the biggest concern. And all I need to post is the below chart to show how little of a concern it should be.

Lockheed Martin is a dividend darling. Currently yielding just over 3% and paying out ~$11.40 per share in 2022, it's hard to argue with what is being offered. This most recent increase in Q3 was the 20th consecutive year with an increase and that's not about to change. Twenty years of straight increases requires incredible cash management. Given the cash flow growth that is coming down the line as laid out earlier, I think some of these future estimates could be a bit low as well. They are calculating for 7.5% year-over-year growth or less, and from 2016-2021 there has been an average dividend growth of over 9%. Obviously, as the dividend increases, it does get harder to grow, but in theory, the share price should be growing as well leaving the yield between 3 and 4% which is extremely healthy.

(Source: Company Presentation)

The other thing having free cash flow allows is buybacks. The company announced in the Q3 earnings call in October that the board had increased the remaining share repurchase authority by $5 billion. Before that announcement, it was only $1 billion, bringing the total to $6 billion. They said the plan is to spend that $6 billion on buybacks over the next 12-18 months, which is outstanding news for shareholders. This is on top of the $2 billion spent on buybacks in the first 3 quarters of 2021. Pretty impressive stuff.

In terms of safety, there is nothing to worry about. The company is currently paying out at a ratio of just under 50%, which is just fine. Even Seeking Alpha rates the safety as an A+. Looking forward three years with planned increases in cash flow, as well as dividend increases it's expected that the ratio drops even further, which is why I lean towards some bigger increases than is expected.

(Source: Simplywall.st)

Worst case scenario here, you own get incredible yield in a generally low-risk stock with some growth potential, which means you get paid to wait, and there's nothing wrong with that!

What Are The Risks?

The current main headwind remains to be supply chain issues. Lockheed Martin is seeing all sectors get impacted, and it's affecting the bottom line. All of this can be tied to the fallout from COVID-19. Lockheed Martin is far from the only company suffering issues with regard to the supply chain. It seems to be an "excuse" in almost every earnings transcript I read these days, and it's a fair one. The biggest issue is that the problem seems to be getting worse, not better at current times. If it continues, we will see the company miss on expectations, but I do think this would present a buying opportunity. At this point, it's out of their control, and all they can do is be patient until things get better, which I am hoping we see in 2022 at some point.

What Does The Price Say?

This is a tough one. Looking below we can see that fair value is given at $514, which I do think is a little high. But, at the same time, we look at what some of these EV companies are valued at, and they have only ever produced a handful of cars. Then you have a company that produces quality jets and has for years, and the value becomes a concern? It's an interesting time in markets for sure. That said, as mentioned, I do see this as a slow-growth stock that pays a quality dividend. Not necessarily a value play. What we can do is look at the charts and determine if now is a good time to buy, or if we will get a better price point soon enough to wait.

(Source: Simplywall.st)

I want to start with some of the gap histories the stock has. A gap means a big overnight price move, one way or the other. Looking below. We can see three clear gaps that have been left over the last year and a half. Two of which have both been filled, and then instantly saw rejection, which isn't uncommon. The "fill" is simply the price moving to cover the gap later down the road. For example, we saw the gap left in June of 2020 get filled in August/September before rejecting and heading back to lows. Why do I bring this up? Well, we currently have an unfilled gap from the massive 13% drawdown on November 26th of 2021 due to Covid fears. We have come back up 10%, but we still have another 3.5% to go to "fill the gap".

(Source: TC2000.com)

If I were looking to initiate a long position, and I cared about every penny in capital gains as well, I would prefer to wait to see the price eclipse the previous high of $378.10. Otherwise, we have just put in a lower high, which is generally a bearish pattern. Before that happens, we need to see this current downtrend on the daily chart get broken, which we are less than 3% away from testing. A break of that would be bullish and would all but set up a test of the previous high.

(Source: TC2000.com)

In short, I would like to see three things happen before I bought in from a technical standpoint:

1. The downtrend gets broken

2. The gap gets filled (and not rejected)

3. A close with a higher high over $378.10.

That's not too much to ask for, is it? Time will tell.

Wrap-Up

As you can see, there is a lot to like as a shareholder of Lockheed Martin. The company is incredibly stable, thanks to where they are getting the majority of their revenue from. If they can get the supply chain issues behind them, I do think the company will see some pretty respectable growth over the next few years. Mix that in with a booming buyback program, and a growing dividend and you have a pretty good long-term investment on your hands. If you are looking for quality defense exposure, and some stable income this stock is for you.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.