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Investment Outlook 2024: The Ultimate Portfolio Protection in a Volatile Market

We’re nearing the end of the year, which means it's time to look ahead at the investment landscape for the year ahead.

I wish I could end the year on a more optimistic note. But I’m afraid that there are already signs we could be in for a turbulent 2024…

To start with the obvious, the violence that broke out in Israel added a lot of volatility to an already unstable global political landscape.

That’s not to mention how the conflict will almost certainly lead to more partisan gridlock back here in the U.S. too.

After all, disagreement over how much support to send Ukraine was partly responsible for stalling negotiations that nearly led to a government shutdown in September.

Congress got its act together at the last minute and passed a bill to temporarily fund the government before a shutdown last time.

But they only kicked the can down the road, pushing the problem until mid-November. Depending on when you read this, another stalemate could have caused an actual shutdown.

So to sum up where we’re at, a powder keg in the Middle East has gone off… Congress can’t seem to reach a lasting budget agreement to avoid a government shutdown….

And we’re entering a presidential election year, when volatility stemming from policy unknowns and negative campaigning will flood the market.

In times like these, it pays to have some defensive positions in your portfolio that can provide stability when volatility strikes.

So for our 2024 investment outlook, we’re doubling down on a stock from our portfolio that’s the ultimate hedge against uncertainty.

Before we get to this month’s income play though, let’s first discuss one relatively safe bet in a world full of wild cards.

Invest in a Sector Resistant to Partisan Gridlock

Government spending is a can of worms that we don’t necessarily need to open here. I certainly have thoughts on the topic, as I’m sure you do too.

But regardless of your position, two things remain true: the U.S. government has an enormous military budget, and military spending has been on the rise for several years.

It’s unlikely that the U.S. will significantly cut spending in a time like this where two ongoing conflicts require the country’s military support. Herein lies the income opportunity…

Increased military aid means new lucrative deals for American defense contractors that supply the country and its allies with munitions.

In 2022, the U.S. sent a whopping $113 billion in aid to Ukraine alone. As I write this, politicians are drafting, negotiating, and revising similar spending plans to assist Israel.

And there’s no telling whether these conflicts could escalate into broader regional wars, requiring even more military spending.

Looking at the current state of U.S. politics and the world more generally, increased defense spending seems like one of the surest bets you can make.

Now, I know what you might be thinking… Won’t a government shutdown put a hold on military spending? And wouldn’t this put a dent in revenue for defense contractors?

Well, yes and no. A prolonged shutdown could temporarily freeze new deals with defense companies, who get the bulk of their business from the federal government.

But large defense contractors, like the one I’ll discuss in a moment, are more insulated from these pauses than you might think.

That’s because they work on long-term contracts and typically have billions of dollars in backlogged projects to keep them busy.

In previous government shutdowns, these companies tend to underperform the broad market. But they rebound quickly and usually outperform as soon as a deal is reached.

So a government shutdown — whether it’s in 2023 or the next time Congress can’t seem to get past a gridlock — may present an opportunity to buy these stocks at a better price.

An Essential Component of Any Wartime Portfolio

This month we’re reiterating our “buy” recommendation on Lockheed Martin Corp. (LMT), the largest defense contractor in the United States.

If you’re not already familiar, the company engages in the research, design, development, and manufacturing of defense technology systems, products, and services worldwide.

Lockheed Martin is one of the U.S. government’s go-to manufacturers for advanced fighter planes, high-tech missiles, and cutting-edge electronics.

The company operates through four main business segments.

lockheed-business-segments

First is Aeronautics, its biggest revenue generator, which includes all of the company’s operations in advanced military aircraft, unmanned air vehicles, and related technologies.

Next is Missiles and Fire Control, which offers a diverse lineup of products and services ranging from complex air and missile defense systems to mission operations and engineering support.

The Rotary and Mission Systems segment deals with military and commercial helicopters, surface ships, radar systems, simulation and training, cybersecurity, and more.

And finally, the Space segment engages in (often classified) projects related to the development and production of satellites, space transportation systems, and defensive systems.

Lockheed Martin routinely rakes in the most funding from federal defense contracts in its industry. In fiscal 2022, the company inked $47.7 billion in deals with the U.S. government.

While the U.S. government is responsible for roughly 70% of Lockheed Martin’s revenue, it also does business with over 50 other countries worldwide.

We added Lockheed Martin to the Lifetime Income Report portfolio in September 2022 as a pure play on increased global military spending, which topped $2 trillion for the first time last year.

With the ongoing Russia-Ukraine war and rising tension between the U.S. and China over Taiwan, it was clear that record-high defense spending would continue to rise.

Obviously, we couldn’t have predicted the horrific Hamas attack or the full extent of the Israeli government’s response.

But my original point still stands. All signs indicate that the U.S. and its allies will increase military spending, which will drive business for defense companies for years to come.

Now let’s take a moment to review Lockheed Martin’s performance since our original recommendation last year and why I still think it’s a great income stock today. 

Evaluating Lockheed Martin for the Year Ahead

Lockheed Martin has certainly been busy since the start of the Ukraine war, with countries spending more on military aircraft and missile defense systems in response to the conflict.

Since we added it to the Lifetime Income Report portfolio last September, Lockheed Martin inked lucrative deals like:

  • A $996.2 million contract with the U.S. Air Force for ballistic missile system reentry vehicles

  • A $220 million contract to build laser guns for the U.S. military

  • A $499 million contract with NASA for a nuclear rocket engine project

  • And a $5.6 billion sale of new F-35A aircraft to the Czech Republic, just to name a few.

Keep in mind that these deals were planned ahead of the October attack in Israel. So we’re likely to see even more deals over the next several months at least.

Yes, there will always be disagreement in Washington over how much money to allocate to the military, not to mention which conflicts deserve more (or less) support.

But defense spending is always a priority, which is why defense contractors that supply the government with munitions are such stable income investments.

And remember, these types of contracts are long-term commitments, often spanning several years or even decades. 

For example, Lockheed Martin currently has a deal to sell the U.S. F-35 planes until 2044, and the aircraft are expected to operate until at least 2070.

Even long after the sale is over, the planes will still need servicing, which means Lockheed Martin will continue earning revenue from the deal as long as the planes are in use.

The steady inflow of projects like these means that Lockheed Martin always has billions of dollars worth of backlogged orders, which keeps revenue coming in rain or shine.

lir-issue-11-10-23-backlog

It’s hard to find another business with this same level of reliability. As such, Lockheed Martin also has an impressive track record of treating its shareholders well. 

The company has raised its dividend annually for the past 22 years. Since the 1995 merger that created the current iteration of the company, its dividend per share has grown by 1,590%.

To return even more value to shareholders, the company has also been using its free cash flow to repurchase shares. In October, it increased this share repurchase authorization by $6 billion.

lir-issue-11-10-23-cashflow

Shares are currently up nearly 10% since we recommended the stock last year. We’ve also collected $12 per share in dividends (before this year’s dividend raise).

Understandably, the stock soared after the October Hamas attack. But you can still buy shares today at a decent price, considering the stock pulled back significantly over the summer.  

Bottom line, Lockheed Martin provides your portfolio with strong defenses against market turmoil. And its secure (and growing) dividend yield offers income you can rely on.

 

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