We are only a week in and 2021 is already a very different market than last year. Many oil and gas companies saw double-digit highs as WTI crude rose $ 50 a barrel. Technical stocks are underperforming the market and investors are questioning the valuations of expensive home-based businesses.
Like energy, the aviation and defense sectors outperformed the market last year. Many leading companies have fallen by more than 10%, despite S&P 500profit of more than 15%. One of the largest pure defense contractors, Lockheed Martin (NYSE: LMT), was no exception and fell by 9% last year.
Lockheed trades at a P / E ratio of just 15 with a dividend yield of more than 3%. It is an excellent value investment in 2021. It now makes it an excellent buy.
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A sector out of favor
The air and defense sectors are unfavorable for several reasons. As far as aviation is concerned, the commercial airline industry is still struggling. Air traffic drops by more than 50% from early 2020, affecting commercial aircraft manufacturers Boeing and systems and component suppliers such as Honeywell. As a pure defense contractor, Lockheed does no harm to this wind.
Looking further ahead, the US budget could be an excellent resource because it predicts ten years. For the 2021 financial year, which began on October 1, 2020, the forecast calls for $ 753 billion in defense spending. By 2030, that number is expected to grow to $ 913 billion. This may sound like a lot, but it’s really just about a 2% increase per year.
If we look at the macro-growth prospects in the short and long term, there is little argument that the defense sector is not exactly booming with growth. In contrast to this negativity is the fact that Lockheed has only achieved its highest quarterly revenue ever and is expected to end 2020 with an almost record profit and operating cash flow. It also has a record backlog of more than $ 150 billion, giving it a reliable source of future revenue. However, the lead indicates an increase of only 2% in sales in 2021.
Growth prospects
With a low growth forecast in a low-growth industry, investors are likely to be curious to know what Lockheed’s best growth prospects are. The company has invested heavily in its space segment and made billions of dollars in transactions to further dominate the hypersonic (missile) market. With an FY 2020 budget of $ 2.6 billion and an FY 2021 request of $ 3.2 billion, the hypersonic budget is one of the fastest growing investments on the Pentagon’s radar.
On Tuesday, Lockheed signed a $ 4.93 billion deal from the Space and Missile Systems Center at the Los Angeles Air Force Base in California for three next-generation geosynchronous spacecraft orbiting the Earth. In addition to building vehicles, Lockheed also provides software and support services. Contracts like these extend over several years and offer Lockheed a stable business of reliable customers. This contract extends to 2028. In this context, Lockheed generated $ 10.9 billion in the space segment in 2019, accounting for 18% of its total consolidated net sales.
Healthy balance sheet
Space has its prospects, but Lockheed must prove that it can grow its top and bottom lines during a period of tighter spending. The U.S. government is not the only customer of Lockheed, but accounts for more than 70% of 2019 sales, while U.S. allies in the Pacific and Europe account for 10% each and the Middle East for 7%. In addition to being the market leader in several key defense categories, Lockheed’s biggest advantage over its competitors is its balance sheet.
LMT financial debt to equity (quarterly) by YCharts
Lockheed has a net debt position of less than $ 10 billion and the lowest debt ratio to just 0.12. The low debt and low leverage enable it to incur more debt than is necessary to leverage growth, as well as to provide a safety margin to approach challenges.
Stable and growing dividend
A strong balance sheet forms the basis of an excellent dividend stock. 2021 is the 19th consecutive year that Lockheed is raising its annual dividend. At $ 10.40 per share per year, its dividend has risen by an astonishing 2,300% since 2002. Backed by low debt, tons of free cash flow (FCF) and a payout ratio of just 45%, Lockheed’s 3.1% dividend yield is one of the safer. and more attractive industrial stocks in the market.
A rounded up purchase at the moment
Dividend and value investors will find Lockheed’s risk / reward profile attractive. Trading at an below-average P / E ratio of just 15 with low debt, low leverage and stable earnings is the only real negative Lockheed’s uncertain growth rate. But with two to three years of revenue lagging behind, the company is compensating for its lack of revenue growth with reliability.
Lockheed is not the fanciest company, nor is it trying. Instead, it focuses on maintaining a healthy balance sheet and generating tons of FCF that can then be used to grow its dividend. If this is an investment thesis that you may notice, you may want to consider picking up a few stocks now.