How Long Can Lockheed Martin Keep The Yield Up?

| About: Lockheed Martin (LMT)

In the face of declining defense budgets, investors should ask how long Lockheed Martin (NYSE:LMT) can keep paying shareholders the $1/share quarterly dividend currently yielding 4.9%.

Despite being a capital-intensive business, LMT keeps its debt-to-assets ratio at a low 17%, and delivers over $4 billion in free cash flow each year. The only thing shareholders seem to have to fear is fear itself, namely fear that projects will be eliminated as a "peace dividend" is declared.

To forestall that, LMT has been on an acquisition binge aimed mainly at drone technology. Procerus in 2011, Chandler/May in 2012, AME last month - it's all about drones and drone-related technology.

While some workers are looking at lay-offs, meanwhile, the company is still fighting for new money, extending its aircraft line with foreign sales.

But reality is going to bite. When LMT announced a $1.9 billion satellite contract recently, you had to look closely to note that's a 10-year deal, so you're only talking about $190 million/year. The company is moving into health IT, but the numbers there are also barely $150 million/year - this is a company whose most recent year had sales of almost $47 billion.

That dividend costs the company $1.4 billion/year, roughly, which is about half the total annual earnings. Despite the high dividend, the company continues to build cash, and now has $3.5 billion on its balance sheet. So the dividend should be safe for a few years at least.

Investors who care about yield should keep some LMT in their portfolios, and probably buy more on dips, but there will come a time for getting out of it, and you want to keep an eye on it every quarter to make sure the deal flow is maintained. Current talk of defense cuts is an opportunity, but keep your eye on the exits. My guess is you have a good two-or-three year run ahead of you, but watch the dividend more closely than the stock price, and be ready to bounce out in the face of any serious threat to it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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