Peter Lynch used to say that you should know enough about a company to tell its “story” in just a minute or two. I bought Lockheed Martin Corporation (NYSE:LMT) because of their high yield, and relatively cheap valuation. I also thought that Lockheed Martin Corporation (NYSE:LMT) could increase their margins, which would cause better earnings in the future. Let’s see how these assumptions stack up next to the company’s recent performance.
In defense of this industry
I know many people avoid defense stocks because of the potential for budget cuts, or because they don’t support defense stocks in general. However, it’s hard to ignore the significant free cash flow companies in this industry create. When you add the fact that these companies also pay competitive yields, and stocks selling for low forward P/E ratios, investors should re-consider this industry for their portfolio.
Whether you agree with the objectives of companies like Lockheed,
Two weaknesses could be future strengths?
I know that it’s sort of strange logic to suggest that a company’s current weakness could be a strength tomorrow, but that’s exactly what I’m thinking. Companies rarely stand still, and good management looks at weaknesses as areas for improvement instead of as challenges they cannot overcome.
Lockheed is weaker than their competition in their gross margin and free cash flow per dollar of sales. In their last quarter, Lockheed’s gross margin was just 8.77%. By comparison, Northrup’s margin was 24.1%, Raytheon managed 20.92%, and even Boeing had a gross margin of 14.62%.
Since Lockheed Martin Corporation (NYSE:LMT) carries a lower margin, it makes sense that their free cash flow is lower as well. In the last three months, Lockheed produced about $0.09 of free cash flow per dollar of sales. Their competition generated between $0.13 and $0.16 of free cash flow by comparison. The good news for Lockheed Martin Corporation (NYSE:LMT) investors is, as the company focuses on efficiencies in each of their divisions, they should be able to improve their margins in the future.
Growth and income
Lockheed might have room for improvement in their margins and cash flow, but the company is second to none when it comes to dividend yield. At current prices, Lockheed Martin Corporation (NYSE:LMT)’s yield is just under 5%. None of their competitors really comes close, with Raytheon coming in second at about 3.88%. Northrup-Grumman’s yield is okay at 3.24%, but Boeing isn’t in the same class with a yield of just 2.29%. When you consider that Lockheed Martin Corporation (NYSE:LMT) increased this dividend by 15% last year, you can see the company is committed to rewarding its shareholders.
