Defense Stock Face-Off: Northrop Grumman vs. Lockheed Martin -- Which Is the Better Buy Right Now?

Northrop Grumman (NYSE: NOC) and Lockheed Martin (NYSE: LMT) are huge contractors that sit at the center of the aerospace and defense industries. Their shares have fallen by more than 20% during the past three months, despite the war in Iran and rising tensions in the Middle East.

Investors have pivoted away from pure-play aerospace and defense companies toward those with diverse revenue streams that include industrial and information technology exposure, such as Palantir (NASDAQ: PLTR) and General Dynamics (NYSE: GD). The chief reason for the drop for Northrop and Lockheed, though, is that the two are heavily tied to huge, fixed-price development programs. Both companies, though, are profitable, pay solid dividends, and remain good long-term investments. Which of these two is the better defense stock? Let's see.

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Northrop is ramping up production for the B-21 Raider

Northrop Grumman's B-21 Raider, the world's first sixth-generation stealth bomber, has moved past its most precarious financial hurdles. After years of absorbing the fixed-price development contracts, Northrop is now entering the more profitable production phase. The company said it is accelerating its production, with the first aircraft planned for delivery in 2027.

The Air Force plans to procure at least 100 B-21s, while Defense Secretary Pete Hegseth is putting the number much higher, providing Northrop with an enormous, multidecade revenue stream. As production scales, the company's expect improved margins, turning a prestige project into a significant profit driver.

Market dominance in strategic deterrence

Northrop Grumman, meanwhile, is the sole prime contractor for the LGM-35A Sentinel program, the replacement for the aging Minuteman III intercontinental ballistic missiles. This program represents the land leg of the U.S. nuclear triad and is seen as a critical defense priority. Although the program has faced scrutiny over rising costs, its crucial status ensures that Northrop will remain at the center of U.S. strategic defense for the next 50 years.

The program is in early prototypes, and production is expected to begin with the first test flights in 2027, with beginning capability expected early in the next decade. Combined, the two programs contribute to the company's order backlog of $95.6 billion.

Financial discipline and shareholder returns

Despite the capital intensity of its major programs, Northrop has maintained a strong commitment to its shareholders. The stock, at its current price, offers a dividend yield of about 1.7% and the company has a consistent history of raising payouts. As the development drag from the B-21 eases, the company's free cash flow should increase. The company often uses this cash for aggressive share repurchases, which helps bolster earnings per share (EPS) and provides a safety net for the stock price during periods of market volatility.

The company has increased its dividend payouts for 22 consecutive years, including an 11% increase in 2025. It appears well positioned to continue its increases. In the first quarter, it reported revenue of $9.8 billion, up 4% year over year, and EPS of $6.14, up 85% from the first quarter of 2025.

Lockheed has a record $186 billion backlog

The most compelling reason to own Lockheed Martin is the sheer visibility of its future revenue. As of the end of the first quarter of 2026, the company reported a backlog of $186.4 billion. This represents more than two full years of total production capacity.

Key drivers include a surge in orders for the High Mobility Artillery Rocket System (HIMARS), with new partnerships recently signed in Eastern Europe, and high demand for Lockheed's PAC-3 and Terminal High Altitude Area Defense (THAAD) missile interceptors, which remain at historic highs as nations prioritize air sovereignty. The U.S. government, in April, signed a $4.7 billion contract for PAC-3 missile segment enhancement with Lockheed. This follows a January deal to quadruple production of THAAD missile interceptors.

The F-35 moat and sustainment pivot

The F-35 Lightning II remains the central pillar of Lockheed's Aeronautics segment. The U.S. Defense Department budget for 2026 is calling for 85 new F-35s, up from 47 in fiscal 2026.

With roughly 1,300 F-35s now operational worldwide, Lockheed is transitioning from being just a manufacturer to a long-term service provider. As the fleet ages, the high-margin revenue from maintenance, software upgrades, and pilot training will likely provide a more stable and profitable earnings stream than initial hardware sales.

In the first quarter, Lockheed's sales were little changed, up less than 1% at $18 billion, and its EPS of $6.44 fell about 12% from the same period a year ago. Full-year projections for revenue were between $77.5 billion and $80 billion, up 5% at the midpoint, while full-year EPS was estimated to be between $29.35 and $30.25, up 39% at the midpoint.

Reliable shareholder returns and valuation

Lockheed Martin has raised its dividend for 23 consecutive years, including a 4.5% bump in 2025 to $3.45 per share, for a yield of 2.7% at its current share price. The stock is trading at 25 times earnings, higher than Northrop Grumman's 17, but still attractive considering management's projected EPS growth of 18% during the next three to five years.

The better stock depends on the investor

Lockheed Martin offers a higher dividend yield and a significantly larger backlog. However, its P/E ratio is higher than Northrop's, reflecting the market's growth premium for its F-35 dominance and expanding missile defense framework.

Northrop Grumman offers a compelling value alternative, with a lower P/E ratio, suggesting it may be undervalued relative to its historical performance and peers. Although its backlog is smaller than Lockheed's, Northrop boasts a superior net profit margin. Although its 1.67% dividend yield is lower than Lockheed's, Northrop's lower payout ratio of 29% and higher dividend growth rate (10% compound annual growth rate over three years) suggest more room for future aggressive payout increases.

Ultimately, Lockheed Martin appears better positioned for investors seeking stability and income, as its sheer scale and the moat of its missile programs provide a robust cushion against volatility. Northrop Grumman is likely the better choice for value-oriented investors focused on long-term appreciation, especially as it transitions its next-generation stealth and space platforms into more profitable production phases.

James Halley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.