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The next part of the dividend growth comparison series evaluates the dividend growth prospects of three defense companies: The Boeing Company (NYSE:BA), Lockheed Martin (NYSE:LMT), and Raytheon (NYSE:RTN). Let us take a look at the dividend basics of these three stocks:

  • LMT's current yield of 4.7% trumps both Boeing's 2.4% and Raytheon's 3.7%.
  • LMT's payout ratio is also the highest of the three: at 50%. Boeing's payout ratio is 30%, while Raytheon's is 36%.
  • LMT's average dividend increase over the past 5 years has been about 24%. RTN's average increase over the past 5 years has been 14%, while Boeing did not increase its dividends for 3 years till 2012.

As in earlier exercises, let us take a look at the power of dividend growth for an investor who can set aside his/her money in LMT

Assume you purchase 1000 shares of LMT at the recent price level of $84 for a total initial investment of $84,000. The current yield works out to a commanding 4.7% as shown in the table below. A dividend growth rate of 10% has been assumed for the calculations below, even though the past 5 year average has been more than double that at about 24%. Notice how the dividend payments and the yield on original cost more than double in 10 years, leading to $10,000 in annual dividends.

We have left out the DRIP part from this piece as some investors choose to reinvest the dividends and some do not. Some DRIP during bad times to accumulate more shares and opt out of DRIP when the price per share seems to be at a fair value. In case the price dips, turning on the DRIP will be helpful in maximizing the returns when things turn around.

Inflation has been ignored in this calculation as stocks are the best hedges against inflation when compared to other assets. 10 years is a reasonable time period for this exercise as the market typically moves through many cyclical highs and lows in a decade


(Click to enlarge)

Conclusion:The fact that LMT increased its dividends substantially even during the 2008/2009 market crash is very encouraging to long term investors. The slightly higher payout ratio (not alarmingly high) is also an indication that the company is more committed to returning cash to investors than its two closest rivals. Our conclusion is the same as what is reached in this article: if you are looking for capital growth for the intermediate term, go with Boeing. If you are looking for dividends and dividend growth over long term, LMT is a much superior bet.

Source: Lockheed Martin: Offensive Defense