On March 21, Boeing (BA -9.57%) stock closed 3.1% higher while Lockheed Martin (LMT -4.32%) tumbled 5.8%. The movements resulted from Boeing winning a contract from the Department of Defense for its new warfighter aircraft program -- a contract that Lockheed was the favorite to win.
Big-ticket defense contracts can mean steady cash flows and a reliable project backlog, so it's unsurprising both stocks would move on the news.
The better question is which defense stock is the better buy over at least the next three to five years.
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Boeing is turning the corner
Boeing has been on a roller coaster for the last five years. It suspended its long-standing dividend in March 2020 due to the COVID-19 pandemic. It ran into several problems developing the Boeing 737 Max. Then in January 2024, a door plug detached from a 737 MAX 9 aircraft operated by Alaska Air Group. A subsequent Federal Aviation Administration investigation revealed several quality control and manufacturing issues. To make matters worse, fixed-price development programs have caused losses and delays for Boeing Defense, Space & Security.
New versions of wide-body and narrow-body aircraft are expected to ramp up in the coming years, while the Boeing Defense, Space & and Security segment is expected to continue reducing losses. Boeing is guiding for positive free cash flow (FCF) in the second half of 2025. By 2027, Boeing could fully recover as it fulfills orders for new planes like the 777X.
Boeing has a solid near-term plan, but its results are vulnerable to the economic cycle and geopolitical challenges. Boeing's backlog has been growing as orders pour in from buyers like Emirates and Pegasus Airlines. Boeing exited 2024 with a staggering $521 billion backlog, including 5,500 commercial airplanes.
With Boeing, demand has never been the main problem. Rather, it has been the company's failure to execute that backlog in a timely and cost-effective manner without compromising on quality.
Boeing remains an intriguing turnaround play, but the stock is difficult to value because the company isn't profitable right now. Analyst consensus estimates call for further losses in 2025, followed by a ramp-up in earnings per share (EPS) starting in 2026 with $4.23 EPS. Boeing could begin to look fairly cheap if it can work through its backlog and sustain decent margins. But the lack of a dividend payment removes some of the incentive for waiting for the turnaround to play out.
NYSE: BA
Key Data Points
A stable stalwart
Lockheed Martin has a completely different investment thesis than Boeing. The defense contractor is highly profitable and has paid a steadily growing dividend for 22 consecutive years. The valuation is compelling at less than 20 times trailing earnings and FCF.
Lockheed's streak of dividend raises and yield of 2.9% makes it arguably the best defense contractor purely from a passive income perspective.
LMT Dividend Yield data by YCharts
However, Lockheed's growth has been fairly weak in recent years. Losing the recent contract to Boeing follows up a disappointing quarter and weak guidance that sent Lockheed stock down 9.2% on Jan. 28 -- its largest single-session drop since Oct. 26, 2021. Year to date, Lockheed is down 9.5% compared to solid gains for peers like RTX, which is up 14.4%.
Lockheed's near-term outlook leaves much to be desired, with adjusted EPS guidance of just $27 to $27.30 compared to $27.99 in 2024. Consensus analyst projections call for $29.75 in 2026 EPS -- implying just 6.3% growth compared to 2024.
Lockheed isn't the kind of company that will wow investors with breakneck growth, but it can deliver solid results no matter the economic cycle. Like Boeing, the company has a massive backlog multiples higher than a year's worth of revenue. But unlike Boeing, Lockheed has a track record of consistently working through its backlog and delivering on highly profitable programs like its F-35 fighter jet.
The better buy
Investing is all about trade-offs. The consensus best company in an industry that is firing on all cylinders is likely to fetch a premium price. On the other hand, a company like Boeing has higher risk, but could also have higher potential reward if it finds its footing. Lockheed Martin has an excellent dividend yield and an inexpensive valuation, but it isn't growing quickly.
The better buy comes down to your investment objectives and time horizon. If you're confident that Boeing will return to FCF in the second half of 2025 and never look back, then the company could be a great long-term buy. However, Lockheed is a far better option for risk-averse investors because it has a clear path toward growing its FCF and dividends for decades to come.
It's worth mentioning that Boeing has a worse balance sheet than Lockheed -- with a financial debt-to-equity ratio of 0.4 and a debt-to-capital ratio over 100% compared to Lockheed's more manageable leverage. So even as Boeing improves its profitability in the coming years, it would be wise to shore up its balance sheet before reinstating its dividend.
Add it all up, and Lockheed is probably the better buy for most investors, whereas Boeing is a more speculative turnaround story.
