Editor’s Note: This article is a part of our “Top Grad Stocks 2021” series, where our savvy market analysts recommend their best picks for new graduates’ portfolios. Check out “Money Moves for Recent Grads” for more finance advice and click here to see more stocks for your must-buy list.
With most colleges having concluded the school year and commencement ceremonies having taken place, new graduates are free to move on to the next chapter of their lives. Recent graduates entering the workforce will be receiving their first regular paycheck. While this paycheck will cover rent and other necessities, one other very important item to consider is saving for retirement.
Those graduating this year are likely to remain in the workforce for at least 30 years. While that may seem like a long way off, starting to invest at an earlier age allows for invested capital to compound for a longer period. This can position investors for a much better retirement, and possibly an early retirement.
The best-case scenario is for new grads to find excellent dividend growth stocks for the long term, such as those from the Dividend Achievers Index, which are stocks with at least 10 consecutive years of dividend growth. For that reason, we recommend Lockheed Martin (NYSE:LMT) as a long-term stock to buy for new grads.
LMT Stock: Background and Catalysts for Growth
Those making their first investment should consider companies with proven track records of growth that also pay rising dividends. High-quality companies are able to grow dividends through the harshest of economic conditions.
Lockheed Martin is the largest company in the aerospace and defense sector. The company is composed of four business segments, including Aeronautics (which houses military aircraft like the F-35, F-22 and F-16), Rotary and Mission Systems (which produces helicopters, naval ships and electronics), Mission Systems, Missiles and Fire Control (which creates missile defense systems) and Space Systems (which provides satellites).
The company’s business is fairly diversified. While Aeronautics does account for approximately 40% of sales, no other segment produces more than a quarter of annual sales. Lockheed Martin’s sources of revenue also offer some protection from diversification. For example, 60% of revenues come from the U.S. Department of Defense. Then, 30% comes from international customers and 10% comes from other U.S. government agencies.
The company is blessed with competitive advantages and catalysts for growth that should provide for growth well into the future.
Long-Term Growth Is Ideal For Recent Grads
Young investors purchasing stocks to buy and hold for the long term need to be concerned with the long-term growth potential of a company. Lockheed Martin enjoys durable competitive advantages that will keep it an industry leader for decades to come. Government spending is one of the major tailwinds for the aerospace and defense sector as a whole. U.S. spending on defense has increased by nearly 25% over the last five fiscal years.
As the largest company in the aerospace and defense sector, Lockheed Martin is in a prime position to capitalize on higher defense spending. The company ended the most recent quarter with a backlog of more than $147 billion, giving it a long runway of growth for decades to come.
These competitive advantageous and catalysts for growth have allowed the company to grow its earnings per share (EPS) at an annualized rate of 12% over the last decade. EPS grew more than 13% from 2007 to 2009, showing just how recession-proof this industry can be.
While we think growth may slow somewhat from its long-term growth rate over the next five years, ultimately, Lockheed Martin’s leadership in its industry and its entrenched product portfolio should position the company as an excellent investment for years to come. At the same time, dividends should continue to grow as well.
Lockheed Martin raised its dividend by 10% in 2020, extending its dividend growth streak to 18 years. In addition to growing EPS through the last recession, Lockheed Martin also raised its dividend almost 60% during this stretch of time. This should give investors the confidence that the next recession won’t be a hindrance to the company’s ability to grow its dividends, even if the size of the increase may not repeat.
Lockheed Martin has raised its dividend at a rate of nearly 12% over the last decade. Most companies tend to show smaller dividend increases over time as it becomes more difficult to provide a large growth rate off of a higher base. Lockheed Martin’s most recent increase shows that high growth rates are still very much a reality for shareholders.
The company can do this because its dividend payout ratio is so low. The company is expected to distribute $10.40 of dividend per share in 2021. Using our expectation of $26.55 of EPS for the year, the payout ratio is just 39%. Lockheed’s earnings growth rate coupled with the low payout ratio should equate to high dividend growth rates going forward.
Quality dividend growth stocks like LMT stock are especially valuable for new grads, because young investors have the longest time-horizon. With so many years ahead of them, they have the luxury of time to allow for compounding to work its magic.
Lockheed Martin’s balance sheet reinforces our belief that the company’s dividend will remain on strong footing. The company ended the most recent quarter with $51.4 billion of total assets, including $20.3 billion of current assets and $2.9 billion of cash and equivalents. This compares favorably to total liabilities of $45.1 billion and current liabilities of $14.7 billion. It is unlikely that debt will be an impairment to future dividend growth. Maintaining a healthy balance sheet is another important consideration in determining which stocks will be rewarding to hold long-term.
Final Thoughts on LMT Stock
New graduates entering the workforce have many choices when it comes to investing. We believe that investing in high-quality companies with strong business models and a history of growing dividends are the best ways to invest for retirement.
To that end, a pick like LMT stock is an excellent way to build wealth over the long-term.
On the date of publication, Bob Ciura held a long position in LMT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.