Is Lockheed Martin a Buy as Global Defense Budgets Surge?

Global defense spending has sharply risen in recent years, driven by escalating geopolitical tensions. The Russia-Ukraine war, concerns over China’s intentions in the Asia-Pacific, and the ongoing Israel-Gaza conflict have all contributed to a 5.4% annual increase in military budgets since 2021. This surge has pushed global defense spending to an impressive $2.3 trillion in 2024, up from $2 trillion just a few years ago.

With regional conflicts intensifying, especially involving Israel and Iran-backed forces, nations are boosting their military investments to ensure they’re prepared for any potential escalation. For instance, the U.S. alone has spent over $22 billion on military operations in the Middle East since the onset of the Israel-Gaza conflict in October 2023, including support for Israel, air defense systems, and combating Iranian-backed militants.

As a result, defense-related stocks have soared, with the S&P 500 Aerospace & Defense Industry Index up 20% this year. Moreover, investors’ interest in this sector is evident from the inflows of the iShares U.S. Aerospace & Defense ETF (ITA), which are nearing record highs. As global defense budgets continue to grow, the sector is expected to expand at a CAGR of 3.5%, reaching $3.08 trillion by 2032.

Is Lockheed Martin a Buy as Global Defense Budgets Surge?

With defense stocks in high demand, fundamentally robust companies like Lockheed Martin Corporation (LMT) seem well-positioned to capitalize on this long-term trend.

As the largest defense contractor in the United States, Lockheed benefits from its extensive presence in both domestic and international defense sectors. The company’s innovative products and solid financial standing have helped its stock soar more than 50% over the past year and almost 33% year-to-date. With such impressive gains, it’s no surprise that many investors are eager to add LMT to their portfolios.

However, before making any quick decisions, let’s take a closer look at what’s driving this surge and whether the stock’s growth prospects are worth the risks.

What’s Behind Lockheed’s Recent Surge?

The company’s reputation for delivering innovative, high-demand military technology enables it to enjoy a continuous flow of orders for its wide range of defense products, from stealth fighter aircraft and combat ships to military radars and lethal missiles. With the U.S. being the world’s top weapons exporter, LMT’s solid foothold in this market gives it a significant advantage over its peers.

The company recently announced a flurry of significant government contracts, securing deals worth hundreds of millions. These include $422 million for integrating the Czech Republic into the F-35 Joint Strike Fighter program, $3.23 billion for air-to-surface missiles, $358 million added to a $1.1 billion Foreign Military Sales missile procurement, and $3.9 billion for Trident II D5 missile production, along with $321 million for a U.S. Missile Defense contract. Impressive, isn’t it?

But that’s not it; the company’s bright prospects are reflected in its financials, too! LMT’s net sales increased 8.6% year-over-year to $18.12 billion in the fiscal 2024 second quarter (ended June 30). Its consolidated operating profit grew marginally from the year-ago value to $2.15 billion, while its non-GAAP net earnings amounted to $1.70 billion in the same period.

The company’s adjusted earnings for the quarter rose 5.6% year-over-year to $7.11 per share, beating analyst estimates by 10.2% due to strong sales and improved profits. Also, its free cash flow increased by 95.3% from the year-ago value to $1.51 billion.

As of June 30, 2024, the company’s cash and cash equivalents increased to $2.52 billion from $1.44 billion recorded as of December 31, 2023. Buoyed by this solid performance, LMT revised its full-year outlook, projecting EPS in the range of $26.10 to $26.60, with expected revenue between $70.50 billion and $71.50 billion.

While analysts predict a slight 4.6% drop in EPS for the year ending December 2024, its revenue is expected to grow by 5.4% year-over-year to $71.23 billion. For fiscal 2025, forecasts suggest revenue and EPS will hit $74.17 billion and $28.28, reflecting a year-over-year increase of 4.1% and 6.6%, respectively.

Investors Are in For a Treat

Lockheed’s strong financial position also allows it to reward shareholders generously. As of Jun 30, 2024, the company paid out dividends worth $1.53 billion, which substantially boosted shareholders’ pockets. Moreover, it recently increased its quarterly dividend by $0.15 to $3.30 per share, payable on December 27, 2024.

With 22 consecutive years of dividend growth, Lockheed is on track to join the Dividend Aristocrats soon. The company offers a stable dividend with a four-year average yield of 2.66% and a payout ratio of 44.3%. Its current annual dividend of $13.20 yields 2.18% at the prevailing share price, while its dividend payouts have grown at a CAGR of 6.6% over the past three years.

Additionally, its board has authorized an extra $3 billion for share repurchases, bringing the total authorization for buybacks to around $10 billion. This substantial buyback capacity reflects the company’s confidence in generating cash as it continues to turn its multi-year backlog into revenue.

Bottom Line

As geopolitical tensions rise, the defense industry continues to benefit from increased military spending worldwide, making companies like Lockheed Martin attractive investments. Moreover, the war in the Middle East and the broader global threat level have spurred greater urgency in defense budgets, particularly in the U.S., which could boost international sales for Lockheed.

Historically, defense stocks tend to outperform during periods of monetary easing, and with the recent Fed rate cuts, there’s potential for further positive momentum. RBC Capital Markets emphasizes that LMT could see positive sentiment continuing into 2025, driven by projected mid-single-digit growth in free cash flow and solid quarterly results.

Investors should keep an eye on Lockheed’s upcoming quarterly report, which will focus on F-35 fighter jet deliveries and initial guidance for 2025. With RBC raising its price target for LMT’s stock to $675, it’s clear that sentiment is improving due to better-than-expected sales growth.

While the outlook remains promising, it’s essential to consider both the rewards and potential risks. Market conditions and geopolitical shifts can affect defense stocks, and one should stay informed. However, given LMT’s strong financials, stable dividend payouts, and buyback program, we believe it could be a solid addition for investors seeking to gain defense sector exposure.