This post was written by Bob Ciura on November 15, 2016, for Sure Dividend
Lockheed Martin (NYSE:LMT) stock has a lot to offer investors. It has a 3% dividend yield, which is above-average compared with the S&P 500. In addition, it is a high dividend growth stock. Earlier this year, Lockheed lifted its dividend by 10%. And, it has a strong business model and generates a lot of free cash flow.
Lockheed is a Dividend Achiever. It has raised its dividend for 14 years in a row. You can see a list of all 273 Dividend Achievers here. What's more, each of those dividend increases was at least a 10% hike, or greater. Read on to see why Lockheed Martin stock could help bullet-proof your portfolio.
Lockheed is a global defense company. It is a giant in the defense industry, with an $81 billion market capitalization and $46 billion of annual revenue.
It operates in five business segments:
- Aeronautics (34% of annual revenue)
- Information Systems & Global Solutions (IS & GS, 12% of annual revenue)
- Missiles and Fire Control (MFC, 14% of annual revenue)
- Mission Systems and Training (MST, 20% of annual revenue)
- Space Systems (20% of annual revenue)
Aeronautics includes the manufacture of advanced military aircraft, including combat and air mobility aircraft. The aeronautics segment is Lockheed's largest, for a very simple reason. It houses the F-35 program, Lockheed's flagship business. The F-35 program itself makes up 20% of Lockheed's total revenue.
The IS & GS segment provides advanced technology systems for civil, defense, intelligence and other government functions. The IS & GS business also helps customers gather and analyze data.
The MFC segment provides air and missile defense systems, primarily for the U.S. army but also for other nations. It houses the Patriot Advanced Capability-3 (PAC-3) and Terminal High Altitude Area Defense (THAAD) air and missile defense programs.
MST designs and manufactures a variety of military and civil helicopters. It also designs ship and submarine mission and combat systems for aircraft, radar systems, and cybersecurity solutions.
Lastly, the Space Systems business is engaged in R&D and engineering of satellites, missile systems, and space transportation systems.
These five businesses each are highly profitable and generate tremendous cash flow for the company. For example, Lockheed generated $3.8 billion of free cash flow over the first three quarters of 2016.
Source: Third-Quarter Earnings Report, page 8
Lockheed has excellent growth prospects. First, it has a strong competitive advantage. Lockheed has proven to be on the precipice of innovation in the global defense industry. It has increased R&D spending for four years in a row.
Last year, Lockheed invested $839 million in R&D. This investment has created a sustainable edge over the competition. Another growth catalyst for Lockheed is the simple reality that geopolitical risk is a constant across many parts of the world. As a reflection of this reality, global defense budgets continue to rise. This creates a very steady demand for the defense industry.
From 2006-2015, Lockheed increased earnings per share by 8% compounded annually. Lockheed's future growth will be supplemented by its massive project backlog. At the beginning of 2016, Lockheed had $99.6 billion project backlog, which increased 23% over the last five years.
In fact, last year Lockheed set a company record for cash flow from operations and order backlog.
The company is off to a great start this year. Sales and operating profit rose 15% and 14%, respectively, last quarter.
Source: Third-Quarter Earnings Report, page 4
A key component of Lockheed's future growth will be through new geographic markets. Last year, Lockheed generated 79% of its annual revenue from the U.S.
Lockheed management states it will lower its reliance on the U.S. to 75% of annual revenue going forward. To do this, it is securing significant contracts overseas. For example, last year Lockheed generated a $750 million contract to train Australian Defense Force pilots.
The other way Lockheed will expand its presence in the international markets is through acquisitions. Lockheed acquired the Sikorsky business from United Technologies (NYSE:UTX) for $9 billion. Nearly half of Sikorsky's revenue comes from outside the U.S.
Dividends and Buybacks
Lockheed has a very shareholder-friendly management team, which is committed to returning cash to shareholders.
Lockheed has such a strong dividend because the company generates a ton of cash. In 2015, Lockheed's operating cash flow of $5.1 billion far exceeded its $939 million of capital expenditures. Free cash flow came to $4.1 billion for 2015.
With such strong free cash flow, Lockheed raised its dividend by 10% this year and also approved a $2 billion addition to its share repurchase authorization.
Source: Third-Quarter Earnings Report, page 9
As you can see, Lockheed has significantly reduced its share count over an extended period.
Since it generates billions of dollars each year in free cash flow, it has plenty of room left to continue increasing its dividend. The current $7.28 per share dividend payout represents 60% of Lockheed's expected 2016 earnings per share.
A 60% dividend payout ratio is modest and sustainable over the long term.
Future Expected Returns
Lockheed Martin's stock is valued very close to its historical average. Since 2000, it has traded for an average price-to-earnings ratio of 14.5. The stock currently trades for a price-to-earnings ratio of 15.
Since Lockheed's stock appears to be fairly valued, share repurchases and dividends will be the major drivers of shareholder value creation moving forward.
By buying back its own stock, Lockheed helps boost future earnings growth. Fewer shares outstanding means each remaining share receives a greater portion of earnings per share.
Going forward, returns will be reliant on earnings per share growth and dividends. Investors can expect earnings per share growth to be comprised of:
- 3%-5% revenue growth
- 2% margin expansion
- 2% share repurchases
Cumulatively, this would result in 7%-9% annualized returns. In addition, shareholders will receive Lockheed's 3% current dividend yield. As a result, investors can reasonably expect 10%-12% total returns each year.
Lockheed Martin has virtually everything an income investor would want. The stock offers a 3% dividend yield, which is well ahead of the 2% average yield in the S&P 500. Furthermore, Lockheed stock offers high dividend growth rates from year to year, often in the double digits.
Lastly, it has a well-defined plan for future growth. This will be done primarily through growth in new markets, via acquisitions. As a result, Lockheed is a highly attractive Dividend Achiever.