Editor’s note: This column is part of our Best Stocks for 2021 contest. Bob Ciura’s pick for the contest is Lockheed Martin (NYSE:LMT).
The gradual rollout of the coronavirus vaccine is one of the events investors are looking forward to the most in 2021. But even with the eventual end of the pandemic on the horizon, the U.S. economy is by no means out of the woods. And with stock market valuations at record highs not seen in years, investors might want to consider defending their portfolios against volatility.
One way to do this is to buy high-quality stocks that pay dividends to shareholders and operate business models that are resistant to recessions. Lockheed Martin (NYSE:LMT) is a blue-chip stock with a market-beating 3% dividend yield, long-term growth and a business model built to outlast even a severe economic downturn.
Defend Your Portfolio With Lockheed Martin In 2021
Lockheed Martin is the largest U.S. defense company, with a market capitalization of $100 billion and nearly $60 billion in annual revenue. The majority of the company’s revenue is derived from the U.S. Department of Defense, with the remainder generated from other domestic government agencies as well as international defense agencies.
This company operates multiple segments, with its flagship aeronautics programs like the F-35, F-22 and F-16 accounting for approximately 40% of total revenue. Other major programs include combat ships, helicopters, missile defense systems and satellites.
In 2020, which proved to be an extremely challenging environment for companies across numerous industries, Lockheed Martin has continued generating steady growth. In the third quarter, total sales increased 9% while diluted earnings-per-share increased 10% year-over-year.
In fact, over the first three quarters combined, revenue and earnings-per-share rose 10% and 7.5%, respectively. These would be respectable results in a normal economy but considering the extreme challenge of the coronavirus pandemic, Lockheed Martin’s continued growth is even more impressive.
Long Runway Of Dividend Growth
Going forward, investors can expect the company to keep posting steady growth, even if the global economy enters another downturn. Lockheed Martin ended the 2020 third quarter with a massive backlog totaling $150 billion, an indication that its products and services remain in high demand. Acquisitions will help accelerate these growth catalysts.
For example, Lockheed Martin recently acquired Aerojet Rocketdyne (NYSE:AJRD) for $4.4 billion, expanding Lockheed’s position in an adjacent category of defense rocket engine manufacturing. The acquisition was conducted at a reasonable valuation, as Aerojet Rocketdyne posted 2019 revenue of approximately $2 billion, which means the deal is likely to be accretive to Lockheed Martin shareholders over the long term.
Continued long-term growth will naturally benefit investors, as Lockheed Martin is a shareholder-friendly company committed to returning cash through share repurchases and dividends. Lockheed Martin generates strong free cash flow every year, even in 2020, due to its highly profitable business model.
And that money gets paid to shareholders in a number of ways. In September Lockheed Martin increased its quarterly dividend by 8%, and the stock has a solid 3% yield, nearly double the average dividend yield of the S&P 500.
Separately, Lockheed Martin also increased its share repurchase authorization by $1.3 billion, with $3.0 billion remaining under the buyback program as of September 27. Share buybacks will help boost future earnings-per-share growth by reducing the number of shares outstanding.
Attractive Total Return Potential
Shareholder returns are comprised of a company’s earnings-per-share growth and dividends, as well as changes in the valuation multiple. Sure Dividend anticipates 10% annual EPS growth for Lockheed Martin, comprised mainly of revenue growth and share buybacks. The 3% dividend yield will add to shareholder returns each year.
Finally, Lockheed Martin stock is attractively valued, with a 2020 P/E ratio of 14.3, based on our estimate of $24.45 in full-year EPS. Sure Dividend sees fair value as a P/E ratio of 16, which means expansion of the valuation multiple would boost annual returns by 2.3% per year.
The combination of EPS growth, dividends and an expanding P/E multiple could produce total annual returns above 15% per year, including 2021. This makes Lockheed Martin a top blue-chip stock for dividend growth investors, as well as the rare security that sidesteps the typical growth versus value tradeoff.
On the date of publication, Bob Ciura did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.
