Top Grad Stocks 2021: Lock in Long Term Dividends with LMT Stock
Editor’s Note: This article is part of our “Top Grad Stocks 2021” series, where our savvy market analysts recommend their top picks for new graduate portfolios. Check out “Money Moves for Recent Grads” for more financial tips and click here to see more actions for your must-buy list.
With most colleges wrapping up the school year and opening ceremonies having taken place, new graduates are free to move on to the next chapter in their lives. New graduates entering the workforce will receive their first regular paycheck. While this paycheck covers rent and other necessities, another very important item to consider is saving for retirement.
Graduates this year will likely stay in the workforce for at least 30 years. Although it may seem like a long time ago, starting to invest earlier allows the invested capital to build up over a longer period of time. This can position investors for much better retirement and possibly early retirement.
Ideally, new graduates should find excellent long-term dividend growth stocks, like those in the Dividend Achievers Index, which are stocks with at least 10 consecutive years of dividend growth. For this reason, we recommend Lockheed Martin (NYSE:LMT) as a long-term buy-in stock for new graduates.
LMT Stock: Context and Growth Catalysts
Those making their first investment should consider companies that have a proven track record of growing and also paying growing dividends. High quality companies are able to generate dividends under the most difficult economic conditions.
Lockheed Martin is the largest company in the aerospace and defense industry. The company is made up of four business segments, including Aerospace (which houses military aircraft like the F-35, F-22 and F-16), Rotary and Mission Systems (which produces helicopters, ships warfare and electronics), mission systems, missiles and Fire Control (which creates missile defense systems) and Space Systems (which provides satellites).
The activity of the company is quite diversified. While aerospace accounts for around 40% of sales, no other segment produces more than a quarter of annual sales. Lockheed Martin’s sources of income also offer some protection against diversification. For example, 60% of revenue comes from the US Department of Defense. Then 30% come from international clients and 10% from other US government agencies.
The company benefits from competitive advantages and growth catalysts that should ensure growth in the future.
Long-term growth is ideal for recent graduates
Young investors who buy stocks in order to buy them and hold them for the long term need to be concerned about a company’s long-term growth potential. Lockheed Martin enjoys enduring competitive advantages that will make it an industry leader for decades to come. Public spending is one of the main favorable winds in the aerospace and defense sector as a whole. US defense spending has increased nearly 25% in the past five years.
As the largest company in the aerospace and defense industry, Lockheed Martin is in a privileged position to capitalize on higher defense spending. The company ended the most recent quarter with an order book of more than $ 147 billion, giving it a long avenue of growth for decades to come.
These competitive advantages and growth catalysts have enabled the company to increase its earnings per share (EPS) at an annualized rate of 12% over the past decade. EPS grew by more than 13% from 2007 to 2009, showing just how recession-resistant this industry can be.
While we believe growth may slow down somewhat from its long-term growth rate over the next five years, ultimately Lockheed Martin’s leadership in its industry and strong product portfolio should position itself. the business as a great investment for years to come. At the same time, dividends are also expected to continue to grow.
Lockheed Martin increased its dividend by 10% in 2020, extending its dividend growth streak to 18 years. In addition to EPS growth during the last recession, Lockheed Martin also increased its dividend by almost 60% during this time. This should give investors confidence that the next recession will not be a barrier to the company’s ability to raise dividends, although the magnitude of the increase may not be repeated.
Lockheed Martin has increased its dividend at a rate of almost 12% over the past decade. Most companies tend to show smaller dividend increases over time as it becomes more difficult to deliver a high growth rate from a higher base. Lockheed Martin’s most recent increase shows that high growth rates are still a reality for shareholders.
The company can do it because its dividend payout ratio is so low. The company is expected to distribute $ 10.40 in dividend per share in 2021. Using our expectation of $ 26.55 EPS for the year, the payout ratio is only 39%. Lockheed’s earnings growth rate, coupled with the low payout ratio, is expected to match high dividend growth rates going forward.
Quality dividend growth stocks like LMT stock are especially valuable for new graduates because young investors have the longest time horizon. With so many years ahead of them, they have the luxury of time to allow the composition to work its magic.
Lockheed Martin’s balance sheet reinforces our belief that the company’s dividend will remain strong. The company ended the most recent quarter with $ 51.4 billion in total assets, including $ 20.3 billion in current assets and $ 2.9 billion in cash and cash equivalents. This compares favorably with total liabilities of $ 45.1 billion and current liabilities of $ 14.7 billion. Debt is unlikely to reduce future dividend growth. Maintaining a healthy balance sheet is another important consideration in determining which stocks will be worth holding over the long term.
Final thoughts on LMT stock
New graduates entering the workforce have many investment choices. We believe that investing in high quality companies with strong business models and a history of growing dividends are the best ways to invest for retirement.
To that end, a choice like LMT stock is a great way to build wealth over the long term.
As of publication date, Bob Ciura held a long position in LMT. The opinions expressed in this article are those of the writer, subject to InvestorPlace.com Publication guidelines.