Lockheed Martin Corporation ( LMT - Analyst Report ) received a $34.1 million contract from the U.S. Air Force for follow-on production of paveway II Plus Laser Guided Bomb (LGB) GBU-10, GBU-12 and GBU-16 guidance kits.

With this contract, Lockheed Martin received the majority share of a $56 million paveway II Plus LGB procurement. Production is expected to begin in early 2014. The contract is part of an overall $475 million five-year, firm-fixed-price, multiple-award contract announced by the U.S. Air Force in August 2011. Lockheed Martin was qualified as a paveway supplier in 2001.

Under the contract, Lockheed Martin will build and deliver paveway II Plus LGB kits, consisting of MAU-209C/B computer control groups that contain the electronic guidance system and the associated air foil groups that provide lift and stability to the weapons, in standard GBU-10 MK-84 (2,000 lb.), GBU-12 MK-82 (500 lb.), GBU-16 MK-83 (1,000 lb.) series configurations. All work will be performed at Lockheed Martin's facility in Archbald, Pennsylvania.

Lockheed Martin is a qualified provider of all three variants of paveway II MK-80 series LGBs, and is the sole provider of the paveway II Enhanced Laser Guided Training Round and Dual Mode Laser Guided Bomb. Lockheed Martin has delivered more than 65,000 LGB kits to the U.S. Air Force, U.S. Navy and international customers. Laser guided bombs have been used successfully in overseas military operations.

Based in Bethesda, Maryland, Lockheed Martin is a global security and aerospace company, engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. Key growth drivers of the company are its focus on debt repayment, its ongoing share repurchase program and the incremental dividend. Some of Lockheed Martin’s main competitors are The Boeing Company ( BA - Analyst Report ) and General Dynamics Corporation ( GD - Analyst Report ) .

A few days back, Lockheed Martin had made an announcement to increase the quarterly dividend rate to $1.15 per share, up approximately by 15 cents from the current payout of approximately $1.00 per share. The proposed hike would bring the annual dividend to $4.60, up 15% from the previous payout. The increased quarterly dividend will be paid on December 28, 2012 to shareholders of record at the close of business on December 3, 2012.

The U.S. defense budget for 2012 was $645.7 billion, with the base budget at $530.6 billion and $115.1 billion approved for Overseas Contingency Operations (“OCO”) as supplementary defense spending, mainly to fund ongoing wars. In February this year, the Department of Defense (“DoD”) requested a Pentagon base budget of $525.4 billion for 2013, which is approximately $5.1 billion or 1% less than what is approved for fiscal 2012, with $88.5 billion earmarked for OCO spending.

In early August 2012, the subcommittee recommended $511 billion for DoD’s base budget and $93 billion for OCO spending, for a total of $604.5 billion for fiscal 2013.

Going forward, we believe Lockheed Martin has significant upside potential based on the Obama administration’s focus on Intelligence Surveillance Reconnaissance (ISR), unmanned systems, force protection, cybersecurity, and missile defense. It already sits on an order backlog of approximately $75.5 billion at the end of the first half of 2012.

The company is expected to release its third-quarter 2012 results on October 24, 2012. The Zacks Consensus Estimates for third-quarter 2012 and fiscal 2012 are currently pegged at $1.85 per share and $8.10 per share, respectively.

We currently maintain our long-term Outperform recommendation on Lockheed Martin based on revenue growth, improved earnings guidance, incremental dividend payout and stable order backlog.

Also, shareholder return will continue to be shored up by the company’s focus on debt repayment, its ongoing share repurchase program and the incremental dividend. In the near term, however, Lockheed Martin carries a Zacks #4 Rank implying a short-term Sell rating for the next 1-3 months.