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Lockheed Martin (NYSE:LMT) has been considered one of the market’s best large-cap performers in recent days, with investors flocking to the stock following escalating geopolitical tension. Unfortunately, besides the continuing war happening in Ukraine, there may be the potential for an enduring conflict within the Middle East following Hamas’ attack on Israel last weekend. While lasting wars are actually heartbreaking events, Lockheed Martin is ready to profit from a growing order backlog. In turn, this could sustain its robust revenue and earnings growth, reinforcing a bullish case for its stock.
What Does The Current Geopolitical Landscape Mean for Lockheed Martin?
Lockheed Martin stands as considered one of the largest beneficiaries of the continuing geopolitical turmoil. Wars and conflicts translate to high defense budgets, and provided that Lockheed Martin’s aircraft and weapons systems comprise key components of Western nations’ arsenals, the corporate is ready to maintain winning highly lucrative contracts.
The truth is, NATO allies have already been shipping Lockheed Martin’s Javelin anti-tank missiles and PAC-3 and THAAD interceptor missiles, counter-battery radars, and guided rocket systems, amongst many other supplies, to Ukraine. Moreover, Israel’s Defense Forces (IDF) have been making heavy use of the corporate’s aircraft and defense systems for the reason that weekend invasion. Notably, Lockheed Martin has provided the Israel Air Force with fifth-generation fighter jets and its Multiple Launch Rocket System (MLRS), together with various radars, rockets, fire control, and guidance systems.
Clearly, the corporate advantages from each conflicts straight away. Whether it’s Ukraine depleting NATO’s supplies or the IDF utilizing its own systems and ammunition, the final result for Lockheed Martin will likely be a growing variety of future supply orders. Attributable to the potential for further geopolitical instability as threats loom on multiple fronts (including a possible conflict between China and Taiwan), you possibly can see why investors’ interest in Lockheed Martin has surged recently.
Strong Backlog To Sustain Elevated Results
As I discussed, the continuing escalating conflicts directly translate to a growing order backlog for Lockheed Martin. In turn, that is to sustain elevated results for the corporate.
For context, Lockheed Martin ended Q2 with a record backlog of $158 billion. This was notably higher than the $150 billion value of order backlog the corporate began the yr with.
Thus, with this rising backlog and the resulting increase within the variety of deliveries, Lockheed Martin posted revenue growth of 8% for the quarter, reaching $16.7 billion. Consequently, its earnings also grew, with adjusted EPS rising to $6.73 from $6.32 within the prior yr period. This trend should persist as defense budgets remain elevated, given the present geopolitical landscape.
Is Lockheed Martin’s Decelerating Dividend Growth Concerning?
While the continuing tailwinds Lockheed Martin is having fun with may sound optimistic for its outlook, some investors may query its prospects. It is because Lockheed Martin’s most up-to-date dividend increase was quite underwhelming.
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Earlier this month, the corporate boosted its dividend by 5% to a quarterly rate of $3.15. This marks a deceleration from last yr’s increase of seven.1% and a good steeper one from Lockheed Martin’s 10-year dividend per share (DPS) compound annual growth rate (CAGR) of 10.6%. Due to this fact, it’s not unreasonable that some investors perceived the recent dividend increase as a quite concerning one.
Nonetheless, I think that there are key reasons explaining this deceleration that completely justify management’s decision to pursue a more prudent strategy. First, Lockheed Martin recently delayed deliveries of the primary F-35 fighter jets, which have been upgraded with latest avionics, to the second quarter of 2024.
Probably the most recent adjustment to the schedule indicates that Lockheed now anticipates delivery of just 97 F-35s for this yr. This marks an extra reduction from the previously estimated range of 100 to 200 and a major deviation from the corporate’s initial plan to deliver between 147 and 153 aircraft this yr.
Delayed deliveries could alter the corporate’s cash-flow projections. Thus, it is sensible that management’s dividend increase was more prudent than in prior years. Nonetheless, that’s only a part of the explanation.
One other factor is the corporate’s indebtedness. With its total debt standing at $17.6 billion and rates of interest on the rise, it makes rather more sense for the corporate to prioritize deleveraging before accelerating returns to shareholders. Nonetheless, that’s not bad for shareholders. If anything, getting rid of pricy debt and thus lowering its interest expenses over time must be more accretive to creating shareholder value than boosting the dividend by a more aggressive rate.
Based on this, I do see Lockheed Martin as a robust dividend growth pick. Again, the corporate’s dividend growth could re-accelerate once the present jet delivery slowdown improves and it pays down a few of its expensive debt.
Within the meantime, the stock’s 2.9% dividend yield may not appear substantial through the current rate of interest environment. With the market’s “risk-free” rate near 5% nowadays, it’s harder for investors to get enthusiastic about a 2.9% yield, especially given the recent downshift in dividend growth.
Nonetheless, taking a long-term view, Lockheed Martin’s current dividend and overall growth prospects must be proven superior. The standard of the divided and management’s commitment to growing shareholder value must also be taken into consideration on this equitation. Don’t forget that Lockheed Martin now boasts 23 years of consecutive annual dividend increases, putting it on the trail to becoming a Dividend Aristocrat.
Conclusion
Overall, Lockheed Martin’s recent stock-price surge following the escalating geopolitical tensions underscores its pivotal role in supplying crucial defense systems to nations grappling with conflicts. The corporate’s current order backlog of $158 billion, a record high, speaks to its sustained growth potential as ongoing conflicts worldwide proceed to drive demand for its advanced aerospace and defense technologies.
Despite concerns a couple of deceleration in dividend growth, Lockheed Martin’s strategic decision to prioritize deleveraging and navigate challenges, comparable to by delaying F-35 deliveries, demonstrates a prudent approach to long-term value creation. While the two.9% dividend yield could seem modest in the present interest-rate environment, Lockheed Martin’s proven track record of 23 consecutive annual dividend increases and commitment to shareholder value bode well for the longer term.
In tandem, with shares trading at a price-to-earnings (P/E) ratio of 16.1x, Lockheed Martin appears reasonably valued despite the recent stock-price surge. This P/E ratio is according to its historical average and spotlights an appealing investment case, given the corporate’s resilient outlook in the present industry climate. Consequently, I think that Lockheed Martin is certainly value considering, even by those that sense they may need missed the recent rally.