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Summary

  • LMT is generating strong cash flow, and it returns value to its shareholders by stock buyback and by increasing dividend payments.
  • LMT’s annual rate of dividend growth over the past ten years was very high at 23.5%.
  • LMT’s stock is ranked second among all Russell 1000 stocks that pay a dividend with more than 3% yield according to the "Balanced4" powerful ranking system.

Lockheed Martin Corporation (NYSE:LMT) stock has surged strongly this year. Since the beginning of the year, LMT's stock has gained 9.4%, while the S&P 500 index has increased 4.1%, and the Nasdaq Composite Index has risen 2.9%. Moreover, since the start of 2013, LMT's stock has gained 76.2%, while the S&P 500 index has increased 35.3%, and the Nasdaq Composite Index has risen 42.3%. Nevertheless, considering its good valuation metrics and its strong earnings growth prospects, Lockheed's stock is not expensive, and in my opinion, it still has room to move up. Furthermore, the rich growing dividend represents a gratifying income.

The Company

Lockheed Martin is the world's largest military weapons maker. The company provides advanced technology systems, products and services to the U.S. government and international defense customers. The company was founded in 1909 and is headquartered in Bethesda, Maryland.

Valuation Metrics

The table below presents the valuation metrics of LMT, the data were taken from Yahoo Finance and finviz.com.

LMT's valuation metrics are pretty good; the forward P/E is low at 14.03, the Enterprise Value/EBITDA ratio is also low at 9.88, and the average annual earnings growth estimates for the next 5 years is high at 8.88%. However, the debt to equity ratio is high at 1.28.

Latest Quarter Results

On April 22, Lockheed reported its first-quarter 2014 financial results, which beat EPS expectations by $0.34 (13.40%) and missed on revenues. The company reported first quarter 2014 net sales of $10.7 billion, compared to $11.1 billion in the first quarter of 2013. Net earnings in the first quarter of 2014 were $933 million, or $2.87 per diluted share, compared to $761 million, or $2.33 per diluted share, in the first quarter of 2013. Cash from operations was $2.1 billion in the first quarter of both 2014 and 2013.

In the report, Chairman, President and CEO Marillyn Hewson said:

The strong earnings and operating cash delivered in the first quarter are a result of our continued focus on program performance, affordability and meeting commitments to our customers. Our diverse portfolio of products and services, investment in future innovations and dedicated workforce give me confidence that we'll continue to deliver outstanding results for our customers and return value for our shareholders.

Dividend and Share Repurchase

Lockheed has been paying dividends since 1984, the forward annual dividend yield is high at 3.27% and the payout ratio is at 50.4%. The annual rate of dividend growth over the past three years was very high at 21.9%, over the past five years was very high at 21.2%, and over the past ten years was also very high at 23.5%. I consider that besides dividend yield, the consistency and the rate of raising dividend payments are the most crucial factors for dividend-seeking investors, and LMT's performance has been impressive in this respect.

(click to enlarge)

Source: Charles Schwab

In the first quarter of 2014 the company generated cash from operations of $2.1 billion, repurchased 7.0 million shares for $1.1 billion, compared to 5.1 million shares for $461 million in the first quarter of 2013, and paid cash dividends of $444 million, compared to $371 million in the first quarter of 2013.

Competitors

A comparison of key fundamental data between Lockheed and its competitors is shown in the table below.

There is not a big difference between Lockheed's valuation metrics and those of its competitors. However, Lockheed has the highest dividend yield among the stocks in the group.

LMT's Efficiency and Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the tables below.

(click to enlarge)

Source: Portfolio123

Ranking

According to Portfolio123's "Balanced4" powerful ranking system LMT's stock is ranked second among all Russell 1000 stocks that pay a dividend with more than 3% yield; only Cisco Systems, Inc. (NASDAQ:CSCO) has a higher ranking (see my SA article about CSCO). The "Balanced4" ranking system is quite complex, and it is taking into account many factors like; EPS consistency, technical analysis, valuation, profitability ratios and dividend information. Back-testing over fifteen years has proved that this ranking system is very useful.

Technical Analysis

The charts below give some technical analysis information.

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Chart: finviz.com

The LMT stock price is 0.36% below its 20-day simple moving average, 0.83% above its 50-day simple moving average and 11.81% above its 200-day simple moving average. That indicates a long-term uptrend.

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Chart: TradeStation Group, Inc.

The weekly MACD histogram, a particularly valuable indicator by technicians, is negative at 0.97 and almost fix, which is a neutral signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 58.79 which do not indicate oversold or overbought conditions.

Analyst Opinion

Many analysts are covering the stock, but their opinion is divided. Among the twenty-three analysts, four rate it as a strong buy, three rate it as a buy, fifteen rate it as a hold, and one analyst rates it as an underperform.

TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering LMT stock there are only five analysts who have the four or five star rating, two of them recommend the stock, two others have a hold rating, and one analyst has a sell rating on the stock.

Major Developments

On February 24, the Pentagon said it would shrink the U.S. Army to pre-World War Two levels, and reduce military benefits in order to meet 2015 spending caps, setting up an election-year fight with the Congress over national defense priorities. Defense Secretary Chuck Hagel, previewing the Pentagon's ideas on how to adapt to government belt-tightening, said that the defense budget would be the first to look beyond 13 years of conflict, shifting away from the long-term ground wars like Iraq and Afghanistan.

Since Lockheed derived 82% of its net sales in 2013 from the U.S. government, the decision to reduce the nation's defense budget might be harmful to the company. However, the company still had a massive backlog of $79.6 billion at the end of the first quarter, and it plans to reduce the impact of the decreasing U.S military budget by increasing its international sales. According to the company, it is looking to grow international sales to at least 20% of its revenues in the next years.

Conclusion

Lockheed Martin has good valuation metrics and strong earnings growth prospects, and it increased its 2014 outlook for operating profit, earnings per share, and cash from operations. Furthermore, LMT stock is ranked second among all Russell 1000 stocks that pay a dividend with more than 3% yield according to the "Balanced4" powerful ranking system. Lockheed is generating strong cash flow, and it returns value to its shareholders by stock buyback and by increasing dividend payments. All these factors bring me to the conclusion that LMT stock is a smart long-term investment. Furthermore, the rich dividend represents a gratifying income.

Source: Lockheed Martin: A Long-Term Investment Opportunity In A Good-Yielding Stock