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Summary

  • For each S&P 500 industry sector, I will be taking a look at available companies to help determine the best stocks for income investors.
  • In determining the best stocks per industry, I will be examining both the dividend growth and dividend yields of the stocks.
  • In the Aerospace & Defense industry sector, Lockheed Martin and Raytheon are the clear-cut choices for income investors.

Overview

In this series of articles, I will be identifying stocks from various S&P industries that are best suitable for income investors, based on dividend growth and yield. For Part 1, I will be taking a look at Aerospace and Defense stocks. These stocks include:

  • Boeing Company (NYSE:BA)
  • FLIR Systems (NASDAQ:FLIR)
  • General Dynamics (NYSE:GD)
  • Lockheed Martin (NYSE:LMT)
  • Northrop Grumman (NYSE:NOC)
  • Raytheon (NYSE:RTN)

When ranking these stocks by dividend yield, the order is as follows:

  • Lockheed Martin - 3.25%
  • Raytheon - 2.53%
  • Boeing - 2.24%
  • General Dynamics - 2.23%
  • Northrop Grumman - 2.02%
  • FLIR Systems - 1.14%

When ranking them by dividend growth over the past five years, the order is as follows:

  • Lockheed Martin - 133.3%
  • Raytheon - 95.16%
  • Boeing - 73.81%
  • FLIR Systems - 66.67%
  • General Dynamics - 63.16%
  • Northrop Grumman - 56.38%

In future parts of this series of articles, I will be comparing the dividend yield leader against the dividend growth leader to determine which stock is better suited for specific investors. For example, an investor several years away from retirement, who doesn't need income currently, may care more about dividend growth, while if someone closer to retirement and/or will soon need the income from dividends, then yield will most likely be more important. Since Lockheed Martin leads both categories by significant amounts, this analysis is not needed.

The next step is to take a look at the top two ranked stocks, Lockheed Martin and Raytheon, to see if they are currently stocks worth considering, based on current financials, price, and future outlook.

Lockheed Martin

The company currently has a trailing PE ratio of 16.99x and a forward PE ratio of 14.95x, both of which are historical high compared to the past five years.

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LMT PE Ratio (TTM) data by YCharts

However, when looking at the past ten years, the valuation seems more fairly priced.

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LMT PE Ratio (TTM) data by YCharts

Looking at the chart below, you can see that while Lockheed Martin has seen some recent declines in revenue, the company has been able to continue growing its earnings.

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LMT Revenue (TTM) data by YCharts

Raytheon

Raytheon has actually seen a nearly identical trend in both its trailing and forward PE ratio, currently at 14.91x and 14.11x respectively. And just like Lockheed Martin, Raytheon has seen recent declines in revenue. And just like Lockheed Martin, Raytheon has been able to continue increasing its earnings, at a significantly higher rate than Lockheed Martin.

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LMT EPS Basic (TTM) data by YCharts

Conclusion

Neither Lockheed Martin nor Raytheon are perfect stocks. Both have questions related to their ability to increase revenues in the future; however, both have shown a strong ability to return shareholder value over long periods of time. I think both companies will continue to be solid picks for long-term investors.

Investors who are looking for income now will most likely be better served with Lockheed Martin, as the company does provide a higher yield and has seen higher dividend growth over the past five years.

Investors who are looking further into the future may want to consider Raytheon, as it has been able to increase earnings at a higher rate compared to Lockheed Martin, and perhaps even more importantly, keep its payout ratio low.

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LMT Payout Ratio (TTM) data by YCharts

While neither payout ratio poses a current threat to either dividend, Lockheed Martin's ratio has increased significantly over the past five years. If the trend continues, it could pose some issues several years down the road.

Also, both companies have done a decent job of reducing the number of shares outstanding, with Lockheed Martin seeing a 16% reduction and Raytheon seeing an 18.1% reduction over the past five years.

This helps to show that shareholders should continue to be rewarded, if both companies can overcome short-term revenue threats.

As always, I suggest individual investors perform their own research before making any investment decisions.

Source: The Best Dividend Growers: Part 1, Lockheed Martin And Raytheon