Both of these defensive heavyweights currently have strong bull cases.
As tensions remain high in many regions of the world, there is no doubt that demand for the goods and services of defense companies will continue to be high.
Among the many possibilities, there are two common considerations that are often on the radar of those seeking to invest in defense: RTX (RTX 0.67%) And Lockheed Martin (LMT 0.41%)Let’s see how two fool.com contributors analyze the bull case for each stock.
The prospects of this aerospace and defense giant are improving
Lee Samaha (RTX-TX): While I don’t believe RTX is particularly undervalued at the moment, the company has good earnings growth prospects, a respectable dividend yield of 2.2%, and a solid business mix. The mix of defense and aerospace businesses has worked well over the past few years, with defense cash flows helping RTX’s commercial aerospace business weather tough challenges during lockdowns.
This is a critical point given the nature of both companies. For example, to produce aircraft engines or defense equipment, investments are required over years, and a steady cash flow is needed to back up the investments. In this respect, RTX is a relatively safe business. Its Pratt & Whitney division, which makes aircraft engines, has a long-term revenue stream from lucrative aftermarket sales from engine maintenance. Collins Aerospace is a leading original equipment manufacturer and aftermarket supplier to the aerospace industry.
While there are question marks about the profit margin of Raytheon’s defense-focused segment and overall defense industry margins, there are none about Raytheon’s current backlog of $51 billion. For comparison, Raytheon’s revenue in 2023 was $26.4 billion, and Raytheon’s book-to-bill ratio was 1.13 for the trailing 12 months through the end of the second quarter.
Everything points to a period of solid growth, especially after Pratt & Whitney has put the GTF engine inspection problem behind it.
Wall Street analysts expect RTX’s earnings to grow by 10% over the next few years. With a dividend yield of 2.2%, the stock could generate decent returns for investors in the long term.
Come for Lockheed Martin’s dividend and stay for its valuation
Scott Levine (Lockheed Martin): It’s not just that Lockheed Martin’s dividend now offers a 2.3% yield. The company has demonstrated a quality that RTX lacks: consistent commitment to higher dividends – a desirable quality for defense investors looking to increase their passive income.
LMT Dividend per Share (annual), data by YCharts.
But Lockheed Martin’s appeal goes beyond its increasing payouts. It has managed to do so without jeopardizing the company’s financial health. Over the past five years, Lockheed Martin has averaged a conservative payout ratio of 47%. On the other hand, RTX has had a more worrisome payout ratio of 101% over the same period.
After a strong first half of 2024, Lockheed Martin recently revised its 2024 forecast upwards. While the company had originally forecast revenue of $68.5 billion to $70 billion for 2024, it now expects revenue of $70.5 billion to $71.5 billion. Management also expects better results at the bottom of the income statement and has raised its forecast for diluted earnings per share (EPS) from $25.65 to $26.35 to $26.10 to $26.60.
Lockheed Martin, a leading defense solutions provider, has also taken a deep dive into the final frontier, making it a top choice for investors looking to gain exposure to the emerging space economy. Lockheed Martin further expanded its position and announced the planned acquisition of Terran Orbita satellite manufacturer. The transaction, which is expected to close in the fourth quarter of 2024, is valued at $450 million, significantly lower than the $600 million offer Lockheed Martin previously made.
Lockheed Martin stock isn’t a screaming buy right now, but its valuation is certainly attractive. Lockheed Martin stock is currently trading at 20.2 times trailing earnings, a significant discount to RTX’s P/E of 68.5. Similarly, Lockheed Martin is valued at 16.1 times operating cash flow, while RTX stock has a cash flow multiple of 27.7.
Should you buy these stocks now?
Both RTX and Lockheed Martin are attractive options for investors looking to bolster their portfolio with an attractive defense stock. For those who would also like to have a top space stock in their portfolio, Lockheed Martin is a better fit than RTX, while those interested in a more focused defense company will prefer RTX.
Lee Samaha does not own any stocks mentioned. Scott Levine does not own any stocks mentioned. The Motley Fool recommends Lockheed Martin and RTX. The Motley Fool has a disclosure policy.
