Dear Mr. Berko: I bought 75 shares of Lockheed Martin in late 2016 at $260 a share after reading your column praising the stock. You said that it had good dividend growth and that revenues and profits would continue to grow at an uninterrupted pace. I also remember that in some other column, you claimed that wars and the “expectation of hostilities” are very profitable for business. For some reason, the government is stopping the manufacture of the F-35 fighter plane indefinitely. Why? What’s wrong here? Is Lockheed going to lose this contract? I am a little nervous about this and need to know whether you think I should take my short-term profit. — FP, Rochester, Minn.
Dear FP: Lockheed Martin Corp. (LMT-$312), with $50 billion in revenues, is the world’s largest defense contractor. LMT derives 65 percent of revenues from the U.S. Department of Defense, 15 percent from other U.S. government agencies and 20 percent from foreign military programs. War is a wonderful business for LMT. And it’s a super repeat business because planes wear down and get shot down and must be replaced, or they become damaged and new parts have to be procured and installed. It’s estimated that the government will spend over $1.4 trillion in the next 20 years to maintain its fleet of F-35s. That’s a hugely profitable maintenance contract. Meanwhile, production wasn’t stopped; shipments were halted temporarily, but they have recently resumed.
One problem is the F-35’s sticker price and sloppy cost overruns. The other problem is that the Trump administration was furious at the cost increases and threatened to kill the program. In 2011, Lockheed contracted with the Pentagon to build 2,400 F-35s at a cost of $49 million a copy, but thanks to 28 super-lobbyists on LMT’s payroll — plus multiple millions in “jam money” given to 37 members of Congress (also on LMT’s payroll) — the cost of an F-35 had zoomed to $136 million by 2016. Lockheed’s corrupt influence-peddling, using taxpayer dollars to line the pockets of flagrantly crooked congressmen, is why the cost of an F-35 exploded by $87 million in five years. Gen. Norman Schwarzkopf, who publicly detests most congressmen for their lack of probity, remarked that most members of the House and Senate climax when a lobbyist brings a briefcase to a dinner meeting. Few of us realize how culpable and venal members of Congress can be.
Even without the scalawags in three-piece suits or their distaff side cuties in skirts and very high heels, LMT should grow faster than other defense firms — thanks to the F-35, with which no other fighter can compare, and to an impressive turnaround at Sikorsky. Sikorsky, owned by LMT, is the leader in commercial and military helicopters. Meanwhile, international F-35 sales were given the green light by Congress. As of August, LMT had delivered 235 of these flying beasts to our allies — namely, Japan, France, Great Britain, Israel and even Saudi Arabia. These sales, including maintenance and parts, account for 25 percent of LMT’s revenues. That amount should increase to 30 percent as more conflicts around the globe are instigated with the help of the CIA and American nongovernmental organizations.
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Don’t you dare sell your LMT. Rather, buy 25 more shares, and definitely hold them indefinitely. The Trump administration asked LMT to reduce the cost of producing an F-35 by 20 percent by 2019, and when LMT is successful, the Pentagon will compensate it with lucrative no-bid contracts totaling billions of dollars for electronics and missile systems. Management expects a 23 percent improvement in net profit margins (to 9 percent) in the next four years and revenues of $61 billion in the same time period, up from this year’s $50 billion. By 2022, the number of LMT’s outstanding shares should fall from 440 million to 240 million. And some analysts expect a $12 dividend on earnings of $22 a share by 2022. Give management a gold star. If those numbers come close to panning out, LMT shares could trade in the high $500s. I do hope you’re reinvesting the dividend, which has increased for 15 years in a row. Isn’t war wonderful?
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at email@example.com.