Lockheed Martin Is Advancing 21st Century Security

Lockheed Martin (LMT) is advancing 21st Century security. This is one reason why it was my 7th largest holdings when I completed my 2023 Year End FFJ Portfolio Review; I hold shares in one of the 'Core' accounts within the FFJ Portfolio.

In addition, LMT benefits from the U.S. Department of Defense and U.S. federal government agencies being its largest customers. While the US government could default on its obligations, I think the probability is low.

I last reviewed LMT in this October 18, 2023 post at which time the most recent quarterly results were for Q3 2023. With the release of Q4 and FY2023 results on January 23, I revisit this holding.

Business Overview

Until such time as LMT releases its 2023 Form 10-K and 2024 Proxy Statement, I recommend you review LMT's website, Part 1 of the 2022 Form 10-K, and the 2023 Proxy Statement if you are unfamiliar with the company. In particular, you may wish to learn how LMT is advancing 21st Century security.

The Risk Factors section within LMT's Form 10-K provides a good overview of various risks that could impact its business, financial condition, operating results and cash flows.

Financials

Q4 and FY2023 Results

I reference the material available in the Quarterly Results section of LMT's website.

The following is a very high level recap of LMT's Q4 2022 and Q4 2023 results.

At the time of my October 18 post, LMT's YTD FCF amounted to ~$4.568B. In Q4, LMT generated ~$1.7B of FCF, helped by ~$0.625B in working capital reductions from timely billings and collections.

In LMT's FY2023 outlook provided with the release of Q3 and YTD2023 results, the forecast was for:

• net cash provided by operating activities: ≥$8.15B;
• CAPEX: ~$1.95B; and
• FCF: ≥$6.2B.

LMT, however, generated $7.920B of net cash provided by operating activities in FY2023. Having fallen short of its outlook, LMT lowered its CAPEX to ~$1.691B thus enabling it to exceed its FY2023 FCF outlook by $29 million ($6.229B).

In the first 3 quarters of FY2023, LMT repurchased $3B of issued and outstanding shares. It repurchased a similar amount in Q4 alone for a total of $6B in FY2023.

Details of LMT's 'Cash Flows and Capital Deployment Activities' are provided on page 8 of 25 in the Form 8-K released on January 23.

Order Backlog

LMT continues to be awarded significant contracts and its FYE2023 order backlog is the highest in the company's history. The following is LMT's order backlog at recent FYEs (expressed in $B).

• 2017 $105.5
• 2018 $130.5
• 2019 $144
• 2020 $147
• 2021 $135.4
• 2022 $150
• 2023 $160.6

FY2024 Outlook

LMT relies heavily on the U.S. Department of Defense and U.S. federal government agencies for the vast majority of its business. It, therefore, closely monitors the status of the U.S. budget process. The current proposed agreement being discussed with the administration in Congress would support an $886B top line budget, 3% higher than 2023.

LMT strongly believes its programs will continue to be well supported as the budget process unfolds.

In addition to the FY2024 outlook metrics provided below, LMT forecasts FCF of $6B - $6.3B in FY2024.

LMT reported $67.571B of Sales in FY2023. Its FY2024 Sales outlook (~$68.5B - $70B) represents a growth range of ~1.4% - ~3.6%.

LMT's FY2024 consolidated operating profit margin (GAAP) outlook of 11.9% is lower than what it achieved in recent years:

• 2017 13.5%
• 2018 13.6%
• 2019 14.3%
• 2020 13.2%
• 2021 13.6%
• 2022 12.7%
• 2023 12.6%

Its FY2024 business segment operating profit margin (non-GAAP) outlook of 10.5% is also lower than what it achieved in recent years with the exception of FY2017:

• 2017 10.2%
• 2018 10.9%
• 2019 11.0%
• 2020 10.9%
• 2021 11.0%
• 2022 11.3%
• 2023 10.9%

Credit Ratings

LMT's senior unsecured domestic currency debt ratings are:

• Moody's: A2 (upgrade from A3 on August 14, 2023)
• S&P Global: A- (stable outlook)
• Fitch: A- (stable outlook)

The ratings from S&P Global and Fitch are the lowest tier of the upper-medium investment grade level; the rating assigned by Moody's is one tier higher.

All 3 ratings define LMT as having a STRONG capacity to meet its financial commitments. LMT is, however, somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.

Dividends and Share Repurchases

Dividend and Dividend Yield

LMT's dividend history is accessible here.

The following are LMT's dividend yield at the time of prior reviews.

• January 25, 2022: shares were trading at ~$380 - the $2.80 quarterly dividend yielded ~3%.
• April 19, 2022: shares were trading at ~$460 - the $2.80 quarterly dividend yielded ~2.4%.
• July 19, 2022: shares were trading at ~$390 - the $2.80 quarterly dividend yielded ~2.9%.
• October 18, 2022: shares were trading at ~$432 - the $3.00 quarterly dividend yielded ~2.78%.
• January 25, 2023: shares were trading at ~$452.50 - the $3.00 quarterly dividend yielded ~2.65%.
• April 18, 2023: shares were trading at ~$501.50 - the $3.00 quarterly dividend yielded ~2.40%.
• July 18, 2023: shares were trading at ~$455.70 - the $3.00 quarterly dividend yielded ~2.63%.
• September 7, 2023: shares were trading at ~$430 - the $3.00 quarterly dividend yielded ~2.8%.
• October 18, 2023: shares were trading at ~$446 - the $3.15 quarterly dividend yielded ~2.83%. This marked LMT's 21st consecutive year of dividend increases.

Within the next few days, LMT will declare its second consecutive $3.15/share quarterly dividend. Looking at the pattern of LMT's dividend increases, we can expect two more $3.15/quarter dividend distributions in April and June.

I envision LMT will increase the quarterly dividend from $3.15 to at least $3.30 in October. Should this materialize, the total value of the 4 quarterly dividend payments subsequent to the declaration of the imminent second $3.15 quarterly dividend, will amount to $12.90 (($3.15 x 2) + ($3.30 x 2)). Using the current ~$440 share price, the forward dividend yield is ~2.9%.

Share Repurchases

LMT is a prolific acquirer of its shares as borne out by the reduction in the weighted average number of issued and outstanding shares in FY2011 - FY2023 (in millions rounded): 340, 328, 327, 322, 315, 303, 291, 287, 284, 281, 277.4, 264.6, and 251.2. The weighted average in Q4, however, was further reduced to 246.1.

In FY2023, LMT repurchased $6B of its issued and outstanding shares. The FY2024 outlook calls for the repurchase of another ~$4B as LMT continues to focus on returns to shareholders.

Valuation

In FY2013 - FY2022, LMT's diluted PE levels were 16.02, 19.47, 19.27, 18.81, 26.04, 24.80, 18.51, 15.16, 16.38, and 22.37.

When I composed my September 6 post, I used the forward-adjusted diluted earnings estimates from the brokers which cover LMT and my ~$430 purchase price:

• FY2023 - 22 brokers - mean of $27.14 and low/high of $26.76 - $27.46. Using the current mean, the forward adjusted diluted PE was ~15.84.
• FY2024 - 23  brokers - mean of $28.10 and low/high of $27.16 - $28.75. Using the current mean, the forward adjusted diluted PE was~15.3.
• FY2025 - 18  brokers - mean of $29.05 and low/high of $26.74 - $31.25. Using the current mean, the forward adjusted diluted PE was ~14.8.

Although LMT's FY2023 adjusted diluted EPS forecast was $27.00 - $27.20, I looked at LMT's valuation if it were to only generate adjusted diluted EPS of $26.50 in FY2023. Using this estimate, I determined the forward adjusted diluted PE would be ~16.23.

When I composed my October 18 post, LMT shares were trading at ~$446. Its valuation using this share price and the currently available forward-adjusted diluted earnings estimates from the brokers which cover LMT was:

• FY2023 - 22 brokers - mean of $27.24 and low/high of $27.00 - $28.00. Using the current mean, the forward adjusted diluted PE was ~16.4.
• FY2024 - 22  brokers - mean of $27.23 and low/high of $25.26 - $28.96. Using the current mean, the forward adjusted diluted PE was ~16.4.
• FY2025 - 19  brokers - mean of $28.74 and low/high of $24.97 - $31.19. Using the current mean, the forward adjusted diluted PE was ~15.5.

I concluded that LMT was slightly undervalued.

LMT has now reported FY2023 diluted EPS of $27.55 and adjusted diluted EPS of $27.82. With shares having closed at ~$440 on January 23, the diluted PE and adjusted diluted PE levels are ~16 and ~15.8.

The company's FY2024 adjusted diluted EPS outlook is currently $25.65 - $26.35 thus giving us a forward adjusted diluted PE range of ~16.7 and ~17.2.

Its valuation using the ~$440 share price and the current broker forward-adjusted diluted earnings estimates are:

• FY2024 - 22 brokers - mean of $26.46 and low/high of $25.68 - $28.50. Using the current mean, the forward adjusted diluted PE is ~16.
• FY2025 - 18 brokers - mean of $28.14 and low/high of $26.02 - $29.53. Using the current mean, the forward adjusted diluted PE is ~15.6.
• FY2026 - 10 brokers - mean of $29.03 and low/high of $26.61 - $31.20. Using the current mean, the forward adjusted diluted PE is ~15.2.

Over the next several days, these earnings estimates are likely to be revised slightly lower as brokers update their estimates. I anticipate that FY2024 and FY2025 forward adjusted diluted PE levels, however, will be somewhat similar to those at the time of my October 18 post.

Final Thoughts

Management anticipates moderate profit and EPS pressure in 2024. Nevertheless, it expects solid cash generation thus enabling it to continue to return cash to shareholders in the form of share repurchases and a dividend increase later in the year.

LMT is advancing 21st Century security and stands to benefit from an increase in global conflict. Its products and services will always be required and there is minimal risk its products will be displaced.

LMT is suitable for investors with a moderate tolerance for risk.

On the return front, I anticipate that LMT is likely to continue to generate a ~10% - ~15% average total annual shareholder return when dividends are automatically reinvested; this will be closer to ~9% - ~14% if dividends are not reinvested.

If you are a Canadian taxpayer holding LMT shares in a taxable account, however, you incur a 15% dividend withholding tax. Your average total annual shareholder return, therefore, will likely be closer to ~8.5% - ~13.5%.

Despite shares being slightly undervalued, I do not intend to immediately acquire additional shares. I remain of the opinion that we are currently experiencing a period of irrational exuberance; a distinct possibility exists that we will experience a brief and unexpected broad market pullback within the next few months. Should this occur, I hope LMT's share price gets caught in the downdraft thus providing investors with the opportunity to acquire LMT shares at a slightly more favorable valuation.

I wish you much success on your journey to financial freedom!

Note: Please send any feedback, corrections, or questions to [email protected].

Disclosure: I am long LMT.

Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.

I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.