Why Lockheed Martin Stock Soared Today
Key Points
President Trump wants a $1.5 trillion defense budget.
He also wants defense companies to spend more on weapons production, not dividends and stock buybacks.
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President Trump announced Wednesday he wants to spend $1.5 trillion on defense:
"For the Good of our Country ... our Military Budget for the year 2027 should not be $1 Trillion Dollars, rather $1.5 Trillion Dollars ... This will allow us to build the 'Dream Military' that we have long been entitled to, and, more importantly, that will keep us SAFE and SECURE."
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Defense stocks in general are surging, and Lockheed Martin (NYSE: LMT) stock in particular gained 6.2% through 10:50 a.m. ET.
Image source: Getty Images.
Details, please
The President didn't say where he wants to spend the $1.5 trillion, or which companies will receive it. One thing he made crystal clear:
Once Lockheed Martin and its peers get the government money, they must invest it to improve weapons quality and maintenance and accelerate production -- not just hand it to executives in the form of fatter paychecks, or funnel it to shareholders via dividends and stock buybacks.
In a separate post, President Trump blasted defense companies for paying "exorbitant and unjustifiable" executive compensation, insisting defense CEOs shouldn't earn more than $5 million per year. He also promised to "not permit Dividends or Stock Buybacks for Defense Companies" until they've addressed his complaints.
Is Lockheed Martin stock a buy?
This could spell trouble for Lockheed. On the one hand, Lockheed can expect a revenue boost. It will need to spend the money on capital investments, however, hurting profit margins earned on that revenue.
What does this mean for investors? Lockheed's been growing revenue at a sub-3% rate the past five years, and that should improve if the $1.5 trillion comes through. On the other hand, Lockheed's profit margin has already fallen from 10.2% two years ago to 5.7% over the last 12 months.
Expect that number to keep on falling.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.
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