Lockheed Martin (LMT, Financial) has surged by 16% in YTD15. However, the stock still remains attractive from a long-term perspective, and these are the critical reasons to consider exposure to the stock even at current levels.
An excellent dividend stock
Lockheed Martin currently has a dividend payout of $6.6 per share, and this translates into dividend yield of 2.99%. Recently, the company increased quarterly dividend from $1.5 per share to $1.65 per share. Robust dividend payout will continue, and this view is backed by the company’s robust cash flow outlook.
Just for the third quarter of 2015, Lockheed Martin generated $1.5 billion in operating cash flow, and the company is likely to report operating cash flow in excess of $0.50 billion for FY15. For FY16, the company’s revenue outlook is largely the same as FY15 and this implies another $5 billion to $6 billion in operating cash flow.
The high dividend payout is sustainable, and another increase in dividend payout seems likely in FY16. This makes Lockheed attractive for dividend investors, and the discussion to follow will elaborate on why the company’s revenue and cash flow will remain robust even in the long term.
In YTD15, Lockheed Martin paid $1.4 billion in dividends and invested $2.4 billion in share repurchase. This provides additional boost to the EPS.
Trans Pacific Partnership agreement
For Lockheed Martin, the primary revenue source has been U.S. government contracts. The company is looking to diversify and expand globally, and this is a significant stock upside trigger for the coming years. With increasing geopolitical tensions, the company’s aerospace and defense products are likely to witness an increasing backlog.
In particular, the Trans Pacific Partnership agreement will help Lockheed Martin expand economic opportunities and strengthen security ties in the Asia-Pacific region. This will contribute meaningfully to revenue in the next three to five years.
According to Lockheed Martin, "We will continue working with the administration and Congress to support an agreement that reduces trade barriers and opens new markets for U.S. companies."
It is clear that the company wants to expand presence globally, and this is the best time for growth as security fears escalate globally. As of FY14, Lockheed Martin has a robust order backlog of $80 billion, and that will expand in the coming years, providing long-term revenue visibility.
Innovation
The aerospace and defense industry has witnessed rapid strides in the last few years; no player can survive without innovation and products that give the military a cutting edge. Lockheed Martin has been among the front-runners in the field of innovation, and this factor will ensure that the company’s market share and product demand remains robust.
From F-35 Lightning II fighters to light tactical vehicles, Lockheed Martin has made successful innovation investments. With the company taking a leap into space exploration, the revenue possibilities are expanding.
The company will continue with its robust research and development program and remain ahead in the industry. Lockheed Martin has also been pursuing inorganic growth, and this is likely to provide an additional trigger from new technology perspective. Overall, the company looks well positioned to remain among the top players in the defense industry.
Conclusion
Lockheed Martin shares should trend higher in the coming years, and the company’s dividend should increase on a consistent basis. Geopolitical tensions aren't likely to ease, and that will provide continued support to the company’s growth.
While the stock has surged in the recent past, current levels are attractive for investment from a three- to five-year horizon.
Disclosure: No positions in the stock
