Lockheed Martin: Top Dividend Grower In Aerospace And Defense

seekingalpha07-25

This article compares financial metrics for five of the largest aerospace and defense companies.I outline why Lockheed Martin is my top choice in the industry, highlighting its dividend, revenue and ...

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Defense Industry has long been a haven for income-oriented investors, boasting a deep roster of dividend-paying companies. Those looking to enter this space face a fortunate dilemma, as eighteen are currently rated as Buy or Strong Buy by analysts. This article aims to help readers navigate these promising options and identify the company that aligns most closely with their investment goals. For dividend growth investors, I argue that at present, Lockheed Martin (NYSE:LMT) edges out its peer group with an industry-leading yield, consistent revenue and EPS growth, and exceptional ROE and ROIC ratios. The Dividends Regular readers will be familiar with my process for narrowing down to the highest-quality dividend payers. For Aerospace and Defense, I use the following filters in Seeking Alpha's screener tool:  Years of increasing dividends - minimum five years of growth  Five-year dividend growth rate - minimum CAGR of 5%  Dividend yield - minimum 0.5%  Dividend payout ratio - maximum 60%  Quant rating - minimum 2.5 (Hold)  Market cap - minimum $5 billion   This quickly reduces the pool to just seven companies: RTX (RTX), Lockheed Martin, General Dynamics (GD), Northrop Grumman (NOC), L3Harris Technologies (LHX), Huntington Ingalls Industries (HII), and BWX Technologies (BWXT). For investors with selective portfolios, i.e., those not likely to own multiple similar businesses, I will eliminate HII and BWXT from consideration due to their decelerating dividend CAGRs. Honorable mention goes to HEICO Corporation (HEI), the industry's overall growth leader over the past decade. However, its 0.1% forward yield is insignificant even with a CAGR of 7-8%. Five companies remain:   DIVIDENDS RTX LMT GD NOC LHX   Years 30 21 29 20 22   Fwd Yield 2.40% 2.51% 1.93% 1.86% 1.93%   5Y CAGR 5.6% 7.7% 7.0% 9.3% 6.8%   3Y CAGR 7.4% 6.9% 6.2% 9.0% 6.8%   Payout Ratio 45.6 32.7% 43.9% 31.0% 36.4%   Click to enlarge The leaders here are LMT (for yield) and NOC (for growth) with RTX a close third. GD and LHX lag somewhat by both measures. While there is no clear winner here, I slightly favor LMT for its more mature yield and low payout ratio, and the fact that it has spent billions the past few years on stock buybacks. Comparison of Financial Metrics To further differentiate between the remaining candidates, I compare key metrics for assessing growth and profitability, starting with revenue and earnings per share:   Revenue RTX LMT GD NOC LHX   10Y CAGR 1.2% 4.5% 3.4% 5.1% 30.0%   5Y CAGR 2.7% 4.3% 2.6% 4.9% 41.2%   3Y CAGR 5.5% 1.8% 3.8% 2.4% 3.6%   FWD 7.6% 3.2% 7.4% 5.6% 9.0%   Click to enlarge All show positive revenue growth-exceptionally positive for LHX. Note that this massive spike for LHX was due largely to the merger between L3 Technologies and Harris Corporation, completed in mid-2019. The merger significantly boosted LHX's revenue, as it combined the market share of two major players in the industry. We can expect the longer-duration CAGRs to normalize in the coming years.   EPS RTX LMT GD NOC LHX   10Y CAGR -8.7% 11.0% 6.2% 4.8% 4.0%   5Y CAGR -17.3% 6.9% 2.0% -5.3% -4.0%   3Y CAGR n.d. 3.3% 3.5% -19.3% -1.4%   FWD 8.2% 9.0% 10.3% 2.4% 3.2%   Click to enlarge Looking at earnings per share growth, LMT and GD have easily been the most consistent while RTX and NOC show significant volatility. Turning to two especially relevant profitability metrics:   ROE RTX LMT GD NOC LHX   5Y avg. 6% 128% 21% 34% 9%   TTM 5% 83% 17% 15% 6%   Click to enlarge   ROIC RTX LMT GD NOC LHX   10Y avg. 5% 13% 9% 10% 7%   5Y avg. 2% 16% 8% 8% 6%   3Y avg. 3% 15% 8% 8% 5%   Click to enlarge LMT stands at the front of the pack for return on equity and return on invested capital. Both GD and NOC have also produced impressive ratios while RTX compares less favorably to its peers. My takeaway: All five companies have performed well over the past decade. That said, RTX (94%) and GD (197%) have lagged the total return of the S&P 500 (240%) over the past decade, and neither have outperformed the iShares U.S. Aerospace & Defense ETF (ITA) or the SPDR S&P Aerospace & Defense ETF (XAR). 10-Year Total Return (Seeking Alpha) The other three companies have beaten these benchmarks on a total return basis, with LHX (327%) just edging out NOC (319%) and LMT (294%) as the leader. Overall, I find LMT the most attractive long-term investment for dividend-growth investors due to (1) having the most attractive yield, (2) its consistent revenue and EPS growth, and (3) its industry-leading profitability metrics. This week's Q2 beats are further evidence that the company is firing on all cylinders. LMT: The Bull and Bear Case LMT is a global security and aerospace company occupying a dominant position within its industry. The company's core strengths are rooted in:   Technological leadership - It invests heavily in R&D, enabling it to maintain an edge in areas such as missile defense and space systems. This has been crucial for securing lucrative government contracts.  Government relationships - As a prime contractor for the U.S. Department of Defense, it enjoys a deep-rooted relationship with the government. This provides a stable revenue stream and access to emerging defense priorities.  Diversification - It operates across multiple segments including Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space, reducing reliance on any single program and mitigating risks associated with cyclical defense spending.  Financial strength - It boasts a relatively strong balance sheet with consistent cash flow generation, which facilitates strategic investments, acquisitions, and shareholder returns.  LMT has further demonstrated a commitment to operational efficiency and growth. Key initiatives include:   Digital transformation - It is investing in technologies to streamline operations, improve decision-making, and enhance customer experience. This includes leveraging data analytics and AI to streamline processes and improve decision-making.  Market diversification - It has been actively expanding its presence in international markets. By capturing growth opportunities outside the U.S., the company reduces its dependence on domestic government contracts and spreads its risk across a broader customer base.  The long-term outlook for LMT is positive due to the reality of consistent and increasing geopolitical tensions, which are likely to drive sustained demand for defense products and services. Furthermore, while defense budgets fluctuate, the U.S. government has long prioritized spending in this area. That said, a reduction in defense spending, whether driven by economic downturns, political shifts, or changes in national priorities, could significantly impact the industry at large. Another potential threat is growing competition from international rivals, particularly in emerging markets, which could erode LMT's profitability. Furthermore, supply chain issues (e.g., leading to component shortages) and natural disasters could disrupt production, increase costs, and delay program deliveries. LMT outlines additional risks specific to its operations in the most recent 10-K from January. Valuation and Price Target At present, each of the companies discussed above is trading richer than its recent historical averages. Wall Street analysts see the most upside with GD (+12%) and NOC (+13%), but I nonetheless see the most long-term value in LMT; its Quant factor rating also happens to be the highest of the group at C. LMT recently raised its EPS guidance for FY24 to $26.10-$26.60. Conservatively, using the lower end, the company is currently trading at 19.7x forward earnings and 18.5x the FY25 estimate of $27.92. Both are above its five-year historical average of 16.2, although there are reasons to argue that average is atypically low. LMT's current price/cash flow and EV/EBITDA ratios are also above their historical averages. Based on predicted EPS growth of ca. 4.4% through 2026, Wall Street analysts have a current price target of $501.35, which suggests overvaluation by around 3%. My own DCF model comes in at $508.39 applying a discount rate of 5.2% and assuming a near-term EPS growth rate of 5% with a terminal rate of 4%. This DCF calculation suggests LMT is priced around fair value. Dividend discount models are not useful when evaluating this company due to its exceptionally high ROE, which skews the expected growth rate. Simple DCF Calculator I rate Lockheed Martin a Hold based on the current share price and valuation metrics, and will watch for dips following the positive Q2 results. Takeaway  The Aerospace and Defense industry presents several strong dividend-paying companies, with LMT standing out as a top choice for dividend growth investors. LMT is highlighted for its industry-leading yield (ca. 2.5%), consistent revenue and EPS growth, and superior profitability metrics such as ROE and ROIC. While other companies like NOC and LHX also show robust fundamentals, LMT's technological leadership, strong government relationships, and financial strength make it an especially attractive long-term investment opportunity, though it may be slightly overvalued at present.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2454731829"}