Lockheed Martin (LMT) is a top holding for Boston-based hedge fund Adage Capital. Taking a peek at the holdings of institutional investors can yield valuable insights. Lockheed Martin is a highly profitable and growing company, with a recession-resistant business model.

In this article, we will analyze one of Adage Capital's largest holdings, Lockheed Martin, which takes up the fourth largest position in the company's portfolio in terms of its weight. Income investors should also see plenty to like about Lockheed Martin, thanks to its 2.5% yield and regular dividend growth.

Overview and Recent Events

Lockheed Martin is the world's largest Aerospace & Defense company globally, boasting a considerable market cap of around $109 billion. To a more or lesser extent, the majority of sectors were affected as a result of COVID-19. However, Lockheed Martin's business model is completely uncorrelated to the rest of the market, with its revenues hitting an all-time high milestone of $16.22 billion, as the company published earlier this week.

Management pointed towards a bright future, reporting a backlog of $150.3B vs. $144B in the quarter before. With a confident book of orders and a sizable momentum, FY2020 guidance was raised. The company now expects EPS of $23.75-$24.05 (vs. the $23.65-$23.95 forecast in April), on net sales of $63.5B-$65B (compared to the previous $62.25B-$64B).

Lockheed Martin's revenues are well secured because around 70% of its total sales are attributed to the U.S. government, 60% of which consists of orders made by the Department of Defense. Approximately 28% of the rest of the turnover is coming from international customers, who also make for credible and secure cash flows as they are usually themselves, or tied to, governmental entities. Since Lockheed's recurring cash flows are contractually tied with governments around the world, it's business model is mostly unparalleled when it comes to consumer spending, and therefore more reliable and predictable.

Attractive Cash Returns

By adding another $1.6 billion of profits to the bank during the quarter, management made sure to keep on rewarding shareholders, as it has done historically. The company's stock repurchases totaled around $1.7 billion over the past four quarters. Its commitment to stock buybacks is quite impressive, with the company having 37% of its total shares outstanding retired over the past 15 years, delivering consistent shareholder value. In fact, the company's robust streams of cash flows are reflected through its buybacks. For example, management accelerated them during the Great Financial Crisis, while the majority of the companies were actually issuing shares to increase their liquidity back then.

In addition, Lockheed Martin has a stellar dividend growth record. The company has increased its distribution over the past 17 years, while DPS has also seen a CAGR of 14.6% since 2010. Considering the company's low payout ratio of just under 40%, and its commitment to returning capital, we believe that the company is on its way to claiming the status of a dividend aristocrat over the next decade, as well.

On the balance sheet's liabilities side, the company holds just above $12 billion of long-term debt. With such a solid client base and historical performance, its cost of debt is around 4.8%. Over the past 10 years, the company ROI (Net Income/ LT investment + LT Debt) has averaged around 30%, which signals that Lockheed Martin has been allocated said capital quite productively. Finally, its debt contains little to no risk, as the company's operating cash flows cover interest payments by more than 13.5 times.

In terms of risks, we consider that Lockheed Martin possesses a fantastic moat, supplying the governments around the world, operating in an industry with an incredibly difficult entry to the market. At the same time, this holds a unique type of risk, as its client base is not diversified, despite its security. Should governmental defense budget are reduced in the future, the company's cash flows will be adversely affected, though this has not been the case for quite some decades. Another risk that we would like to point out is that the company sources some of its materials from foreign manufacturers. Should its supply chains be disrupted, losing access to any of these components, its production lines could also be heavily disrupted. 

Key Takeaways

Concluding, Lockheed Martin is a consistent cash cow. The company has been rewarding its investors with excellent, double-digit returns for years. Considering its latest earnings report, which unveiled a promising future, we believe that Lockheed Martin is a fantastic long-term investment, worthy of occupying one of Adage's most significant holding positions.