Lockheed Martin (LMT) has been at the back of my mind for a while now, teasing me with a 5% yield before the recent market run-up. Now that we've had our run up, LMT is at its highest price since September 2008. Sure, we're having a market rally this year but what about all those macro issues against defense contractors in general? Debt ceilings, sequestration and a war or two ending should keep the defense sector in check but Mr. Market seems to think otherwise.
LMT has been brought to the forefront of my mind thanks to a friend looking for a good yield on a new investment. With LMT reporting on April 23, I would like to share the results of my research so that any others considering a purchase may have some extra data.
First, let's consider the earnings numbers of LMT.
They did well during the boom and started a rough patch in 2009. Last year they actually seemed to be doing well again on an EPS basis.
Now, as everyone here should be aware, LMT pays a good dividend and has actually increased their dividend every year since 2003. Here is a graph showing the declared date of the increased dividend since 2003:
|Declared||Amount||Increase||Rolling 5 Yr|
Note that LMT increased the dividend twice in 2003 but we are only considering the highest dividend declared in 2003 when calculating the Rolling 5 Year Growth. It's also worth pointing out that each of their rolling averages are above a 20% increase. That translates to the dividend doubling every four years. Furthermore, the average individual dividend increase is 25%! Combined with the first graph it is easy to see that, so far in our data, the dividend is easily covered by the EPS.
Next, let's review the sales that all earnings are derived from as well as the earnings each year. All amounts in are millions of dollars:
|Net Sales||% Change||Net Earnings||% Change|
Here is where the concern starts to creep in. Net Sales have actually continuously increased since 2003. However, net earnings decreased for a few years. This actually matches the 2009 - 2011 "rough patch" from the first chart where earnings were generally flat for LMT. Again though, 2012 returns to upward progress and we see an increase.
Finally, I want to review the money spent on buybacks and dividends since 2003. Again all values are millions of dollars:
|Buybacks||% Change||Dividends||% Change|
What jumps out at me is the total amount of buybacks we see, especially 2006 - 2011. Not shown are numbers for stock compensation but they are relatively low, around $160 million a year. Now, we can clearly see that 2012 was a change of pace with regards to returning cash to shareholders. For the first time since 2003 LMT paid out more in dividends than they spent on buybacks. While that is taken into overall consideration of LMT remember that many companies chose to focus on dividends of some kind, not buybacks, at the end of 2012 as we faced the potential for a large increase in the dividend tax rate.
We have seen that the more recent years of LMT show a slowdown in a few key financial areas. In the 2009 - 2011 timeframe net earnings floundered and EPS stagnated. However, I think it would be hard to find companies that weren't affected by the Great Recession during this time. Net sales actually increased, but earnings did decrease although it's not like the earnings fell off a cliff.
We do have to remember that the vast majority of LMT's net sales are to the US government--in 2012 it was actually 82%. Currently we are bracing to feel the effects of Sequestration where the government reduces defense spending. And we repeatedly encounter the debt ceiling. And the United States is winding down the Iraq and Afghanistan wars. So all is gloom and doom, right?
Hardly. Everyone in the defense sector will be affected to some extent but let's bear in mind a few relevant points. First, the United States has increased its debt ceiling twelve (12) times since the beginning of 2003. Somehow I think we're going to raise it again in the future. Secondly, the United States will probably cut defense spending to some extent but that isn't going to eliminate the many year to year contracts for development or maintenance already in place to service its defense needs. Third, even with the end of active combat areas like Iraq and Afghanistan we have no lack of saber rattling around the world, especially from North Korea. We are not here to debate about the efficacy of any missiles that North Korea may possess but LMT just got a $775 million dollar contract to deliver Patriot missile systems. Even without being engaged in active hostilities around the world I think it's safe to say that the United States and its allies will continue to invest in counter measures like this. Sure, there are always competitive concerns like Raytheon (RTN), Boeing (BA) or United Technologies (UTX) but competition is a given in business. And at this time the biggest concern is about the United States' defense spending in general, not a particular competitor.
All things considered I believe LMT has done well for itself during the Great Recession, debt ceiling limits and the decrease of the United States involvement in foreign wars. The numbers from 2012 show an improvement in earnings. There will continue to be a domestic and foreign market for the goods and services LMT provides.
Given LMT's net earnings compared to their sales since 2003 it looks like the biggest contributor to EPS and dividend growth is actually the substantial buybacks. While buybacks are a valid use of a company's money I would rather see continuously increase earnings to match the increasing sales.
Still, the second chart demonstrates LMT's generously increasing dividend. Earnings are not rising fast enough to support the current dividend's growth rate but the dividend itself is not in danger. LMT has a ten year streak of increasing their dividends which shows a commitment to the policy of increasing dividends. Last year they bought back $990 million of shares so hopefully the annual buyback war chest would be reduced before any dividend cut was initiated. I am very surprised to see a company with a current yield of 4.70% that grows at an average of 25% a year. Given that continued growth rate I would normally expect the yield to be much lower, around 1.5% or less.
LMT is due to report on April 23 so we should see how it is affected by the beginning rumblings of sequestration. I very much doubt we'll see a huge negative event although I imagine any nonpositive news will be regarded like the sky is falling for the defense sector overall.
Currently, LMT is hitting 52 week highs even with a 11.5x P/E ratio. The dividend yield is about 4.70% currently. Even though LMT is at a multiyear high I do not think it is overvalued at this time. Given LMT's dividend yield and surprising growth rate I eagerly await their next earnings report and would consider initiating a position if they demonstrate flat or better results.