Better buy: RTX vs. Lockheed Martin

As tensions continue to rise in several areas of the globe, the goods and services of defense companies will undoubtedly remain in high demand.

Among the many options, two common considerations that are often on the radars of those looking for a defense investment are RTX (RTX 0.67%) and Lockheed Martini (LMT 0.41%). Let’s see how two fool.com contributors break down bull cases for each stock.

The outlook for this aerospace and defense giant is improving

Lee Samaha (RTX): While I don’t think RTX is particularly undervalued right now, it has good earnings growth prospects, a useful dividend yield of 2.2%, and a solid business mix. The combination of aerospace and defense businesses has performed well in recent years, with defense cash flows helping RTX’s commercial aerospace businesses overcome severe challenges during periods of lockdown.

It’s a critical point given the nature of both businesses. For example, it takes years of investment to produce aircraft engines or defense equipment, and a steady flow of cash is needed to secure the investment. As such, RTX is a relatively safe business. Its Pratt & Whitney segment, which makes aircraft engines, has a long-term revenue stream from lucrative aftermarket revenue from engine servicing. Meanwhile, Collins Aerospace is one of the leading OEM and aftermarket suppliers to the aerospace industry.

While there are question marks surrounding the profit margin of Raytheon’s defense-focused segment and the overall margins of the defense industry, there are none surrounding Raytheon’s current $51 billion stock. For reference, Raytheon’s sales were $26.4 billion in 2023, and Raytheon’s book-to-bill ratio was 1.13 in the trailing 12 months to the end of the second quarter.

Everything points to a period of solid growth, especially as Pratt & Whitney moves past the GTF engine inspection issue.

Wall Street analysts see RTX earnings growing at a rate of 10% over the next few years. With a dividend yield of 2.2%, the stock could generate decent returns for long-term investors.

Come for the Lockheed Martin dividend and stay for the valuation

Scott Levine (Lockheed Martin): It’s not just that Lockheed Martin’s dividend now offers a forward yield of 2.3%. The company has demonstrated a quality that RTX lacks: consistent dedication to dividend growth, a desirable quality for defensive investors looking to boost their passive income.

LMT Data Dividends per Share (Annual) by YCharts.

Still, Lockheed Martin’s appeal transcends rising payouts. He did this 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 posted a more worrying average payout rate of 101% over the same period.

Following a strong first half of 2024, Lockheed Martin revised its 2024 guidance upward recently. While it had originally forecast 2024 revenue of $68.5 billion to $70 billion, it now expects sales of $70.5 billion to $71.5 billion. Management also expects better results on the bottom line of the income statement, raising its outlook for diluted earnings per share (EPS) to $26.10 to $26.60 from $25.65 to $26.35.

A leader in defense solutions, Lockheed Martin has also paid considerable attention to the final frontier, making it a top choice for investors looking to gain exposure to the burgeoning space economy. Further increasing its position, Lockheed Martin announced its planned acquisition Terran dazzlinga satellite manufacturer. The deal, which is expected to close in the fourth quarter of 2024, is valued at $450 million, far less than the $600 million offer Lockheed Martin previously made.

Lockheed Martin stock isn’t a flashy buy right now, but its valuation is certainly attractive. Lockheed Martin stock currently trades 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 compelling options for investors looking to bolster their portfolios with a compelling defense stock. For those who would also be happy to have a top aerospace stock in their ranks, Lockheed Martin will shine more brightly than RTX, while those who are interested in a more focused defense contractor will be drawn to RTX.