We have only been there for a week and 2021 is already a very different market from last year. Many oil and gas companies are in double digits, with WTI crude oil skyrocketing to more than $ 50 a barrel. Technology stocks are outperforming the market, and investors are questioning the valuations of expensive companies that stay at home.
Like energy, the aerospace and defense sector underperformed the market last year. Many leading companies fell by more than 10%, despite the S&P 500gain of more than 15%. One of the biggest pure defense contractors, Lockheed Martin (NYSE: LMT), was no exception and fell 9% last year.
Trading at a P / E ratio of just 15 with a dividend yield of more than 3%, Lockheed is proving to be an excellent investment in 2021. Here is what makes it a great buy now.
Image source: Getty Images.
A disadvantaged sector
The aerospace and defense sector is disadvantaged for a number of reasons. On the aviation side, the commercial aviation industry continues to struggle. Air traffic fell more than 50% from early 2020 levels, which affects commercial aircraft producers such as Boeing and system and component suppliers as Honeywell. As a pure defense contractor, Lockheed is not suffering from this headwind.
Looking further ahead, the United States budget can be a great resource because it provides for 10 years from now. For the fiscal year 2021, which started on October 1, 2020, the forecast is for $ 753 billion in defense spending. By 2030, that number is expected to grow to $ 913 billion. This may seem like a lot, but in reality it is only an increase of 2% per year.
Looking at the short- and long-term macro growth prospects, there is little argument that the defense sector is not exactly teeming with growth. In contrast to this negativity, is the fact that Lockheed has just achieved its highest quarterly revenue ever and is expected to end 2020 with near-record operating profit and cash flow. It also has a record portfolio of more than $ 150 billion, which gives it a reliable source of future revenue. However, its guidance suggests an increase of only 2% in sales in 2021.
Growth prospects
With a low growth forecast in a low growth industry, investors are probably curious to know what Lockheed’s main growth prospects are. The company has invested heavily in its space segment, doing billion-dollar deals to further dominate the hypersonic (missile) market. With a budget for fiscal year 2020 of $ 2.6 billion and a request for fiscal year 2021 of $ 3.2 billion, the hypersonic budget is one of the fastest growing investments on the Pentagon’s radar.
On Tuesday, Lockheed struck a $ 4.93 billion deal with the Space and Missile Systems Center at Los Angeles Air Force Base in California for three next-generation geosynchronous orbit space vehicles. In addition to building the vehicles, Lockheed will provide software and support services. Contracts like these span several years and provide Lockheed with stable business from trusted customers. This particular contract runs through 2028. For context, Lockheed generated $ 10.9 billion in sales in the space segment in 2019, representing 18% of its total consolidated net sales.
Healthy balance
The space has its prospects, but Lockheed needs to prove that it can increase its profits and earnings during a period of restricted spending. The U.S. government is not Lockheed’s only customer, but it comprised more than 70% of 2019 sales, with U.S. allies in Asia Pacific and Europe accounting for 10% each and the Middle East accounting for 7%. In addition to being a market leader in several important defense categories, Lockheed’s main advantage over its competitors is its balance sheet.
LMT Financial Debt to Equity data (quarterly) by YCharts
Lockheed boasts a net debt position below $ 10 billion and the lowest debt-to-equity ratio of just 0.12. Its low indebtedness and low leverage position it to take on more debt, if necessary, to capitalize on growth, in addition to providing a safety margin to face the challenges.
Stable and growing dividend
A strong balance sheet forms the basis for an excellent stock of dividends. 2021 will mark the 19th consecutive year that Lockheed has increased its annualized dividend. At $ 10.40 per share per year, its dividends have increased by an astonishing 2,300% since 2002. Supported by low indebtedness, tons of free cash flow (FCF) and a payout rate of just 45%, dividend yield of 3, 1% of Lockheed is one of the safest and most attractive industrial stock dividends on the market today.
A complete purchase now
Dividend and equity investors will also find Lockheed’s risk / reward profile attractive. Trading at an average P / E below the market of just 15 with low debt, low leverage and stable earnings, the only negative real is Lockheed’s uncertain growth rate. But with two to three years of revenue in its portfolio, the company makes up for the lack of revenue growth with reliability.
Lockheed is not the most showy company, nor is it trying to be. Instead, it is focused on maintaining a healthy balance sheet and generating tons of FCF that can then be used to increase your dividends. If this is an investment thesis that you can support, then you may want to consider buying some shares now.