Smart Money Is Buying Dividend-Heavy Lockheed Martin And Campbell Soup

Feb.27.12 | About: Lockheed Martin (LMT)

A couple of days ago Lee Cooperman was on Bloomberg TV telling viewers that long-term Treasuries are the worst investments in the market. He is not the only one. Warren Buffett recently iterated similar arguments. Cooperman suggested that dividend stocks would be better for investors than the Treasuries. So we decided to compile the list of high dividend stocks smart money is buying. There are several names but in this article we will focus on Lockheed Martin (NYSE:LMT) and Campbell Soup (NYSE:CPB). This is the first in a series of articles.

Lockheed Martin has a dividend yield of 4.53%, more than doubling the yield of long-term US Treasury bonds. The company has also been increasing its dividend payouts for 9 consecutive years. We think it is very likely that LMT will continue to raise its dividends in the future. Institutional investors recently increased their holdings by 0.53%. The company's fourth-quarter results in 2011 were not as good as those in 2010. It reported net income of $683 million on total revenue of $12.2 billion, versus $961 million net income on $12.8 billion revenue in 2010. However, we think the company's lower earnings are offset by its strong cash flow from operations and return on equity. LMT's net operating cash flow significantly increased by over 650% to $1.2 billion, while the average industry growth rate is about 50%.

Our only concern about Lockheed Martin is its dependence on military spending which may be cut over the next few years. Analysts don't expect net negative developments though. LMT's current P/E ratio is 11.32 and its forward P/E ratio is 10.42 which implies a nearly 9% growth rate in earnings this year. Lockheed Martin is also cheap compared to Boeing (NYSE:BA) which has a current P/E of 14.26 and a forward P/E of 13.38. Although BA is expected to grow at higher rates than LMT (11% vs. 8%), the discount in Lockheed Martin's price compensates for that. Assuming that analysts' predictions are right, Lockheed Martin is a great pick for dividend investors.

Campbell Soup Company also has a dividend yield of 3.46% and a positive institutional transaction of 1.53%. Similar to LMT, CPB's net income is also a bit lower compared to a year ago, while its cash flows are strong. For the 13 weeks ending January 29, 2012, CPB reported net income of $205 million on $2.11 billion total revenue, compared with $239 million net income on $2.13 billion total revenue for the same period a year ago. On the other hand, CPB's net operating cash flow increased by over 350% to $73 million. The company also has strong margins. Its gross margin is 40% and its profit margin is above 10%. We also think CPB is currently trading at a discount. It has a low current P/E ratio of 13.92, versus 16.44 for General Mills Inc (NYSE:GIS). A few other consumer goods companies, such as HJ Heinz Company (HNZ) and Kraft Foods Inc (KFT), also have higher P/E ratios than CPB (18 and 19 respectively). These are low growth stocks with annual expected EPS growth rates in the neighborhood of 7-8%. They also have similar dividend yields.

What we like about Campbell Soup is that it increased its dividends by around 80% since 2004. However it didn't consistently increase its dividends. There were periods where they actually cut dividend payments or kept it constant for more than four quarters. That's why we can't recommend the stock to conservative income investors even though it's a little bit undervalued. We like Kraft better because it didn't cut its dividends even though there were periods where it kept it constant for more than a year. Kraft also more than doubled its dividends over the past 10 years. Currently it yields only 3.1%, so we recommend the stock to younger dividend growth investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.