Defense Stocks Northrop Grumman and RTX Are Tanking. Is Lockheed Martin a Better Buy for Passive Income?

Northrop Grumman and RTX fell 12.2% and 8.8%, respectively, on April 22 compared to a 1.9% gain for Lockheed Martin (NYSE: LMT).

All three defense contractors reported earnings on the same day, with Northrop missing badly on sales and earnings, and lowering its full-year outlook, and RTX guiding for a $850 million full-year tariff impact on operating profit. Meanwhile, Lockheed reaffirmed its full-year outlook -- a noticeable reprieve after it fell 9.2% in a single session following its January report.

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Here's why Lockheed stands out as one of the best defense stocks to buy for passive income.

Image source: Getty Images.

Business as usual for Lockheed Martin

Lockheed Martin has a diversified business spanning four segments -- Aeronautics (led by its F-35 fighter jet program), Missiles and Fire Control, Rotary and Mission Systems, and Space. Its $173 billion order backlog is more than double a year's worth of sales. As of the fourth quarter 2024, the F-35 backlog alone is worth an estimated $33.2 billion.

Lockheed's backlog is reliable because orders come from long-term contracts with the U.S. government -- and, to a lesser extent, approved allies. This makes Lockheed fairly recession-proof, as the company is primarily focused on fulfilling orders and developing new projects, rather than trying to navigate business cycles.

Lockheed reaffirmed its January forecast, with expected full-year 2025 adjusted revenue growth at the midpoint of guidance of 4.3%, a 9.4% increase in free cash flow (FCF), and 3% lower diluted earnings per share (EPS).

On the first-quarter 2025 earnings call, Lockheed attributed its reaffirmed guidance to its strong first quarter and ability to "mitigate or absorb currently known tariff headwinds." In response to an analyst question on tariffs, Lockheed Martin CFO Evan Scott said the following on the earnings call:

I'd say in a lot of cases, we're going to have just direct protection in our supply chain, not in all cases, but in many cases, to avoid tariffs altogether. And then for the vast majority of our external contracts, we've got mechanisms to recover impacts.

Even with the current economic backdrop, Lockheed sees a faster sales growth rate through 2027 than previously expected, consistent FCF growth, accelerated research and development and capital expenditures, and $18 billion in dividends and stock buybacks.

An elite capital return program

Lockheed Martin's predictable cash flows support a solid capital return program. The company distributes the majority of its profits to shareholders through dividends and share repurchases. In the recent quarter, Lockheed returned $1.5 billion to shareholders through buybacks and dividends. Multiply that figure by 12 for the next three years, and you get the $18 billion Lockheed is guiding for in buybacks and dividends through 2027.

Dividends and buybacks are fairly split, with $796 million in dividends and $750 million in buybacks in the recent quarter. Despite sizable buybacks, Lockheed has a dividend yield of 2.9%. Or put another way, if Lockheed didn't buy back stock and only paid dividends, it would yield around 5.5% -- showcasing just how massive its capital return program is.

In addition to its size, what is most impressive about Lockheed's capital return program is that it is entirely funded by FCF. As mentioned, Lockheed is on track for about $6 billion in dividends and buybacks per year, with 2025 FCF guidance of $6.6 billion to $6.8 billion -- Lockheed ensures that it doesn't have to rely on debt to support the program.

Lockheed has raised its dividend for 22 consecutive years -- a reliable track record for dividend growth. Meanwhile, buybacks have been instrumental in keeping Lockheed's valuation inexpensive.

Consider that over the last decade, Lockheed has reduced its share count by 24.2%. With fewer shares to go around, EPS can grow a lot faster than net income, which has helped keep Lockheed's price-to-earnings (P/E) ratio at an inexpensive level. Based on reaffirmed 2025 guidance for $27.15 in adjusted EPS, Lockheed would have a P/E of just 17.1.

A highly reliable dividend stock to buy now

Lockheed is an ideal stock for risk-averse investors concerned about a prolonged period of tariffs and trade tensions. The company's business model is insulated from economic cycles and tariffs. And Lockheed generates so much cash that it can afford to support a massive dividend and share buyback program.

Lockheed's low growth is already reflected in its dirt cheap valuation, making it a good bargain for value investors. Lockheed's 2.9% yield is higher than RTX's 2.1% or Northrop's 1.8%.

Add it all up, and Lockheed is arguably the best defense contractor to buy now for passive income.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin and RTX. The Motley Fool has a disclosure policy.