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Will Lockheed Martin Help You Retire Rich?

Wednesday - 3/27/2013, 1:13pm  ET

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. As part of an ongoing series, I'm looking today at 10 measures to show whether Lockheed Martin makes a great retirement-oriented stock.

Defense companies have been under fire for years as the threat of budget cuts at the Pentagon have hung over their heads. The recent sequestration crisis has only heightened that threat, but Lockheed Martin and its peers are taking steps to shore up their businesses and make it through the tough times. Below, we'll revisit how Lockheed Martin does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Lockheed Martin.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$30 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

4 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

3 years

Fail

Stock stability

Beta < 0.9

0.94

Fail

 

Worst loss in past five years no greater than 20%

(18.6%)

Pass

Valuation

Normalized P/E < 18

11.95

Pass

Dividends

Current yield > 2%

5.0%

Pass

 

5-year dividend growth > 10%

23.1%

Pass

 

Streak of dividend increases >= 10 years

10 years

Pass

 

Payout ratio < 75%

49.3%

Pass

       
 

Total score

 

8 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Lockheed Martin last year, the company has kept its eight-point score for the third year in a row, with free cash flow shrinking but the stock's dividend streak passing the 10-year mark. The stock has managed to eke out a gain of around 5% over the past year.

Lockheed isn't alone in facing defense budget cuts, but it stands to lose a lot more than many of its peers. Its F-35 fighter jet program has been the target of scrutiny due to cost overruns and concerns about quality both in the U.S. and in Canada, and the entire strategy behind focusing U.S. military efforts on a single fighter model has been called into question, opening the door for rivals to regain their standing in the fighter arena. Boeing has experience with its F-15 fighter and vied with Lockheed on the F-35 contract, and it's waiting in the wings for a chance to get its share of the Pentagon's overall fighter budget. Northrop Grumman has turned its attention to unmanned aerial vehicles lately as more budget-cut-resistant, but it could also challenge Lockheed if the F-35 loses confidence.

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