Courtenay: The Aerospace Sector Is Suddenly Soaring

NEW YORK (TheStreet) -- The reasons I initially invested in Lockheed Martin (LMT) had mostly to do with how undervalued it looked when I bought it and the terrific dividend it offered.

I've only owned LMT since Feb. 14, 2013, when I picked up the shares for $86.29. The 5%-plus dividend yield "spoke to me," as did its low price-to-earnings (PE) multiple.

LMT is a great company, and in my book it's the leading publicly traded enterprise of the aerospace and defense sector. The Bethesda, Md.-based company features so many products and services it's hard to wrap one's brain around it all.

It provides research, design, development, manufacture, integration, and support of advanced technology systems and products for defense, civil, and commercial applications in the United States and internationally. Also management, engineering, technical, scientific, logistic, and information services.

LMT's aeronautics segment offers military aircraft, including combat and air mobility aircraft, unmanned air vehicles, and related technologies. Programs comprise F-35 Lightning II joint strike fighter; F-16 Fighting Falcon, a multi-role fighter; F-22 Raptor, an air dominance and multi-mission stealth fighter; C-130 Hercules, a tactical air lifter; and C-5M Super Galaxy, a strategic air lifter.

Its information systems & global solutions segment offers management services, integrated information technology solutions, and advanced technology solutions for civil, defense, intelligence, and other government customers.

This is the division that our nation and other governmental entities can't live without, and it's growing every year.

On Friday, the shares leaped higher in spite of a press release from LMT about the current government spending gridlock commonly referred to as "the sequester." In a carefully worded press release, the company said the following:
"We deeply regret the effect that sequestration is having on our dedicated and hard-working employees. For more than 100 years, our highly talented people have designed and built state-of-the art systems that deliver next generation technology vital to our nation's security and to the world.

"While we await more specific direction from our government customers, we are concerned with the lack of progress toward a solution to reverse the negative impacts of sequestration. We continue to assess the likely impact that sequestration will have on our programs and have taken steps to manage its effect on our employees and our business.
"However, while we understand that the impacts are likely to play out over a period of time, we continue to believe that sequestration will lead to furlough in some situations and could trigger layoffs resulting in Worker Adjustment and Retraining Notification notices to thousands of our current employees. This is a very difficult time for our employees and their families, and the thousands of supplier companies that we depend on to support our customers' mission."

The rest of the release can be found at the company's informative website, which I encourage you to peruse at your leisure.

The sequester is cause for concern and may necessitate a careful approach to the notion of buying shares right now.

This is where having a trailing stop loss can be so helpful if you already own the shares or are thinking about picking up a few soon. A trailing stop loss gives you an exit strategy while the stock moves higher and can protect you on the downside as well.

LMT Chart LMT data by YCharts
As the one-year chart above demonstrates, the share price of LMT has done well. Its year-over-year quarterly retained earnings growth skyrocketed for most of 2012 but cooled off in the fourth quarter. The share price seems to indicate it is picking up again in the first quarter of 2013.

Concerning its best-in-breed dividend (currently yielding 5.15% at the closing price Friday of $89.99), it does concern me that it represents a 50% payout ratio.

When I factor in that at the beginning of 2013, LMT had total cash of $1.9 billion and operating cash flow (TTM) of $1.56 billion flowing in from its many government and private clients, I'm feeling more secure.

Another name in the aerospace and defense sector I like is Raytheon ( RTN) which rose Friday to $56.03 on below average volume. It pays a $2.00 annual dividend, a current yield-to-price of 3.57%.

In comparison to LMT, RTN's dividend represents a payout ratio of only 35% and is backed by over $4 billion in total cash as of the start of 2013.

Take a look at its one-year price chart with the year-over-year quarterly retained earnings growth line.

RTN Chart RTN data by YCharts
Oddly it looks very different than LMT's, and until we're assured that the quarterly retained earnings growth is heading north again, I'd be cautious about owning the shares of RTN. This is doubly concerning in light of the "sequester" situation.

When the "all clear" announcements are made both these stocks could move higher. For dividend-hungry investors, LMT and RTN are worth watching and perhaps accumulating on any corrections. Both are top-notch at what they do and how they are managed.

At the time of publication the author had a position in LMT.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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