Why Fighter Jets, Cigarettes, And Iron Ore Are Good For You After All

Includes: BHP, LMT, MO
by: California Dividend Bull

In my last article, I outlined how I'm sieving out almost 500 corporations currently included in David Fish's monthly dividend Champions, Contenders, and Challengers list. My goal is to select top performing stocks that throw off growing amounts of cash each year in the form of dividends. These dividends, along with the maximum possible infusion of fresh capital I can afford, will add to our retirement portfolios and compound tax-free over the next 20-plus years. Today, I'd like to take a closer look at the three companies that are currently right at the top of my selection list.

1. Lockheed Martin (NYSE:LMT)

The history of this firm goes back a whole century when the Loughead brothers opened a factory building seaplanes in San Francisco, Calif., in 1912. In the same year, Glenn Martin started to build military aircraft in Santa Ana, Calif. In 1994, Lockheed and Martin Marietta merged to form the current Lockheed Martin Corporation, with a market capitalization of $32.5 billion. The company's currently most prestigious project is the F-35 Lightning II, the world's most advanced multirole fighter jet. Other elements of the product portfolio include aerial and naval warfare systems, offensive and defensive missile systems, tactical communications, and dozens of other military and commercial products for customers around the world. A future focus will be on alternative energy systems and nanotechnology as Lockheed is building up know-how and assets in these sectors. Lockheed's main competitors in the defense and commercial sectors are Boeing (NYSE:BA), Raytheon (NYSE:RTN), General Dynamics (NYSE:GD), and Northrop Grumman (NYSE:NOC).

The 2012 annual report shows total sales of $47.2 billion, operating profit of $5.5 billion with earnings per share of $8.36, a free cash flow from operations of $1.5 billion, and a cash dividend of $4.15 per share. The current 2013 dividend is $4.60 per share, which translates to an entry yield of 4.5%.

The company has paid dividend constantly for 28 years and has grown its dividend for 10 years in a row with a 22% annualized average over the last five years. In 1999, LMT cut its dividend in half and then in 2003 resumed paying the same amount as they did before the cut. Right now the management is shelling out about 55% of profits, which is very healthy and leaves room for future increases. Lockheed Martin's current P/E ratio stands at 11.7, which is about 15% higher than the five-year average but still 23% under the peak it had reached in August 2008. Assuming that all factors remain about equal and if you bought today, a $10,000 stake in Lockheed Martin shares could double over the course of nine years just from the dividends.

2. Altria Group (NYSE:MO)

Philip Morris & Co. was incorporated in 1902. In the 1970s and 1980s the company acquired the Miller brewery, General Food, and Kraft Foods. The latter were merged and finally spun off from Philip Morris in 2001. In 2002, the Miller brand was sold to the South African/U.K.-based SABMiller. Altria still owns a meaningful 28% influence in the worlds second-largest beer brewer. The name of the holding company was changed to Altria in 2003 and the international tobacco business was outsourced in 2008. The next year marked purchases of U.S. Smokeless Tobacco and its subsidiary, Washington-state-based Ste. Michelle Wine Estates. Notable competitors in the U.S. tobacco business include Lorillard (NYSE:LO) and Reynolds (NYSE:RAI), which are, along with Philip Morris USA, commonly referred to as "Big Tobacco."

A look at the 2012 annual report reveals a net revenue for the Altria Group of $24.6 billion. Net earnings have been reported with $4.2 billion, which is a $2.06 earning per share. The dividend used to be $1.70 but has been raised to $1.76 for the current year, giving us an entry yield of 4.8%. Altria shares are a bit pricey right now, but what dividend powerhouse isn't these days? (Well, take a look at the next company below to see the answer.) A P/E ratio of 16.9 is about 21% higher than the firm's five-year average.

Altria has been increasing its payout to shareholders for 44 straight years. The last five years had an annualized growth rate of 14.3%, but to be fair, the growth rate is slowing down dramatically right now. The increase in 2008 was a breathtaking 35% and has since gone down to 12%, 9%, 7%, and 5.3%. Being a mature firm with little room to grow results in a rather high payout for investors of a little over 80% of earnings. On top of that, litigation is an ongoing problem for a product, which is the No. 1 cause of preventable deaths in the world. However, with a 50% share of the United States tobacco market, I see a lot of value coming out of this stock for years to come. Just recently the company announced to enter the market for electronic cigarettes, which is currently growing at a rapid pace.

3. BHP Billiton (NYSE:BHP)

Billiton's origins date back to the year 1860 when tin mining rights were purchased for the Billiton island in the Dutch East India colonies (today's Indonesia, Sumatra). Lead and bauxite mining were later added to the tin smelting business. In 1970, the company was acquired by the Royal Dutch Shell (RDS) and subsequently sold to South African Gencor in 1994. The Broken Hill Proprietary Co. Ltd. incorporated in 1885 to mine silver and lead in the remote western outback of New South Wales, Australia. Diversification was achieved by venturing into steel production, as well as copper and diamond mining. The two entities eventually merged in 2001, forming the BHP Billiton corporation as we know it today. During and after the 2008-09 financial crisis, the firm restructured its businesses by selling and ceasing nickel and uranium production at different locations. The company currently further diversifies away from hard commodities like coal and iron ore to mine shale natural gas, especially in the U.S. Other big players in the mining and commodity market are Rio Tinto (NYSE:RIO) and Vale (NYSE:VALE).

Let's have a look at the 2012 report. Revenue was reported at $72.2 billion and profit from operations at $23.7 billion, which is $2.89 per share. In 2012, $2.24 were paid out in dividends, and the dividend number currently sits at $2.28. Dividends are a bit tricky with this company, since the firm is divided into two separate shareholder bodies with different tax implications. The London LSE listed BBL is tax-free for American investors, while the Sydney ASX listed BHP is subject to a 30% tax withholding, making it unsuitable for a Roth IRA since you cannot reclaim the tax (please ask your tax professional for details before making any decisions). The payout ratio of a little over 63% is still healthy, but should be watched.

BHP Billiton has increased its dividend payments for 10 consecutive years at an annualized rate of about 19% over the last five years. Please be aware that this number, just like the Altria example above, is skewed due to a huge increase of almost 50% in 2008. BHP is one of the few big dividend payers that currently trades under their five-year average valuation. At a 10.3 P/E it is about 12% cheaper than over the last year's. The commodity business is very volatile, though, which is indicated by a 1.5 beta and rather big price jumps.

Disclosure: I am long LMT, MO, BBL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.