We are just a week, and the market in 2021 is very different from last year. As the price of WTI crude oil exceeded US$50 per barrel, the share prices of many oil and gas companies rose by double digits. Technology stocks underperformed the market, and investors questioned the valuations of expensive wholly-owned companies.
Like energy, the performance of the aerospace and defense sector seriously lags behind the market last year.in spite of S&P 500The gain is more than 15%. One of the largest pure defense contractors, Lockheed Martin (New York Stock Exchange: LMT)This is no exception, with a decrease of 9% last year.
Out of favor
For many reasons, the aerospace and defense sectors are unpopular. In aviation, the commercial aviation industry continues to struggle.Air traffic flow has dropped by more than 50% from the beginning of 2020. Boeing And system and component suppliers, such as Honeywell. As a pure defense contractor, Lockheed was not harmed.
Looking to the future, the US budget may be a huge resource because it predicts the next 10 years. For the 2021 fiscal year beginning on October 1, 2020, the forecast requires defense spending of $753 billion. By 2030, this number is expected to grow to US$913 billion. This may sound like a lot, but in fact it only increases by about 2% per year.
Looking at the macro short-term and long-term growth prospects, there is almost no evidence that the defense sector has not fully adapted to growth. In contrast, Lockheed has just set its highest quarterly revenue ever and is expected to achieve near-record profits and operating cash flow by the end of 2020. It also has a backlog of more than $150 billion in records, which makes it a reliable source of future revenue. However, its guidance indicates that by 2021, sales will only grow by 2%.
Given the low growth forecasts in low-growth industries, investors may wonder what Lockheed’s highest growth prospects are. The company has been investing heavily in its aerospace sector, conducting multi-billion dollar transactions to further occupy the hypersonic (missile) market. The supersonic budget is a budget of $2.6 billion in fiscal year 2020, and the requirement of $3.2 billion in fiscal year 2021 is one of the fastest-growing investments on the Pentagon’s radar.
On Tuesday, Lockheed received a $4.93 billion deal from the Space and Missile Systems Center at Los Angeles Air Force Base in California for the purchase of three next-generation geosynchronous earth-orbiting spacecraft. In addition to manufacturing vehicles, Lockheed will also provide software and support services. Such contracts last for several years, providing Lockheed with reliable and stable business for customers. The contract is particularly extended to 2028. In this regard, Lockheed’s aerospace business sales in 2019 were $10.9 billion, accounting for 18% of its total consolidated net sales.
Healthy balance sheet
Space has its prospects, but Lockheed needs to prove that it can increase revenue and profit during a period of tightening spending. The US government is not the only customer of Lockheed, but it does account for more than 70% of sales in 2019, with US allies in the Asia-Pacific region and Europe each accounting for 10%, and the Middle East accounting for 7%. In addition to being a market leader in several key defense areas, Lockheed’s main advantage over competitors lies in its balance sheet.
Lockheed’s net debt position is less than $10 billion, and the lowest equity ratio is only 0.12. Its low debt and low leverage ratio allow it to take on more debt when it needs to use capital, and it provides a certain amount of security for meeting challenges.
Steady increasing dividend
A strong balance sheet forms the basis of outstanding dividend stocks. 2021 will be the 19th consecutive year that Lockheed has increased its annual dividend. Since 2002, its dividend per share has been $10.40 per year, an amazing increase of 2,300%. Supported by low debt, large free cash flow (FCF) and a payout ratio of only 45%, Lockheed’s 3.1% dividend yield is one of the safer dividends and the more attractive industrial stocks on the market today Dividends.
Both dividend and value investors will find Lockheed’s risk/return profile attractive. The transaction price is lower than the market average price-earnings ratio of only 15, low debt, low leverage and stable earnings. The only real negative factor is the uncertain growth rate of Lockheed. However, due to a backlog of two to three years of revenue, the company cannot reliably make up for the lack of revenue growth.
Lockheed is not the most flashy company, nor is it the company that it wants to be. Instead, it focuses on maintaining a healthy balance sheet and generating large amounts of FCF that can be used to increase dividends. If this is an investment argument you can fall behind, then you may want to consider buying some stocks now.