It’s no secret that national defense is a big business in the United States. America spends a huge amount of money on defending itself, and as a result, there are several highly profitable publicly-traded defense stocks to choose from.
It seems that the defense industry is at something of an inflection point. The wars in Iraq and Afghanistan are in the draw down phase, and the ongoing sequester is supposed to take a bite out of the lucrative government contracts these defense firms rely on. As a result, should Lockheed Martin Corporation (NYSE:LMT) investors consider a different defense stock, or head for the exits entirely? Or, on the other hand, are the recent headwinds just a blip on the radar?
If there’s a pervasive fear surrounding the viability of Lockheed’s business due to the sequester, you wouldn’t know it by the performance of the company’s stock price. Lockheed Martin Corporation (NYSE:LMT) shares have rallied strongly over the past few years. The stock is up 15% to begin 2013 alone, and has risen more than 30% since the beginning of 2012. These impressive returns don’t even include the company’s generous dividend payments.
Moreover, the $33 billion company’s operating results have belied the pervasive fears surrounding the sequester cuts. Lockheed’s first-quarter total revenues dipped just 2%, year over year. What’s more, Lockheed Martin Corporation (NYSE:LMT)’s diluted earnings per share actually rose 15% over the first three months of the fiscal year, due largely to the benefits of share buybacks and lower expenses.
Other defense firms, including Raytheon Company (NYSE:RTN) and Northrop Grumman Corporation (NYSE:NOC), are also showing resilient underlying performance during these uncertain times for defense firms.
Smaller rival Raytheon, which carries a $21 billion market capitalization, reported its first-quarter total net sales dipped just 1%, but like Lockheed, the company’s profitability strengthened. Raytheon reported 13% higher diluted earnings per share in the first quarter, year over year.
Meanwhile, Northrop Grumman followed the trend. The defense company, which holds a $19 billion market value, held up well to start the year. Its first quarter sales declined by 1.5%, but the company increased diluted earnings per share by 3.5% year over year.
The Foolish bottom line
If the defense industry is doomed as a result of impending budget cuts, it sure wasn’t realized in the first quarter of the year. Each of these companies did what they have done best for many years: producing solid free cash flow and returning a great deal of that cash flow to shareholders.
Raytheon recently raised its dividend 10% and the stock now yields 3.3%, while Northrop Grumman recently bumped up its payout by 11% and provides new investors with a 3% yield at recent prices.
While Raytheon and Northrop Grumman are solid dividend growth stocks, Lockheed Martin Corporation (NYSE:LMT) does its investors even better with a significantly stronger payout and better dividend growth. Despite fear of budget cuts, Lockheed Martin Corporation (NYSE:LMT) maintains a dividend growth policy that is hard to contend with. The company has increased its dividend by 22% compounded annually over the past five years. Lockheed Martin Corporation (NYSE:LMT)’s current payout yields 4.3%, a compelling yield in today’s climate of historically low interest rates.
It remains to be seen how severe an impact sequestration will have on the defense industry. Only time will tell if the possible budget cuts will be as harsh as some predict. For the time being at least, the defense industry is business as usual. In particular, Lockheed Martin is executing extremely well in its long-held goal of generating free cash flow and returning it to shareholders. The stock provides fantastic dividend growth, a high current yield, and a highly profitable business, and in my opinion, is a good stock to buy and hold for many years.
Robert Ciura owns shares of Lockheed Martin. The Motley Fool owns shares of Lockheed Martin, Northrop Grumman, and Raytheon Company.
The article Is Lockheed Martin a Good Stock to Buy? originally appeared on Fool.com.
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