Lockheed Martin (LMT), the largest manufacturer of military defense systems and other non-defense government systems, is a buy for the total return growth and the income investor. Lockheed Martin has steady growth and has plenty of cash, which it uses to expand its product line and buy back shares. I received a lot of comments from a previous article on Raytheon (RTN) that mentioned LMT, so I decided to take a look and found another great military defense company. The company is being reviewed using The Good Business Portfolio guidelines, my IRA portfolio of good business companies that are balanced among all styles of investing.
The graphic below shows the future of supersonic aviation. NASA awarded the contract to build a quiet, supersonic aircraft, now known as X-59 QueSST.
Source: Lockheed Martin website
When I scanned the five-year chart, Lockheed Martin has a great chart going up and to the right for years 2014 thru 2017. The latest dip in 2018 has created a buying opportunity for this solid growth and income investment.
Fundamentals of Lockheed Martin will be reviewed on the following topics below.
- The Good Business Portfolio Guidelines
- Total Return and Yearly Dividend
- Last Quarter's Earnings
- Company Business
- Recent Portfolio Changes
I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am taking a look at. For a complete set of the guidelines, please see my article " The Good Business Portfolio: Update to Guidelines, August 2018". These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that hopefully keeps me ahead of the Dow average.
Good Business Portfolio Guidelines
Lockheed Martin passes 11 of 11 Good Business Portfolio guidelines, a good score (a good score is 10 or 11). These guidelines are only used to filter companies to be considered in the portfolio. Some of the points brought out by the guidelines are shown below.
- Lockheed Martin does meet my dividend guideline of having dividends increase for 7 of the last ten years and having a minimum of 1% yield, with 17 years of increases and a 3.3% yield. Lockheed Martin is, therefore, a good choice for the dividend income investor. The five-year average payout ratio of dividends is moderate at 60%. After paying the dividend, this leaves cash remaining for investment in expanding the business and buying back shares.
- I have a capitalization guideline where the capitalization must be greater than $8 Billion. LMT passes this guideline. LMT is a large-cap company with a capitalization of $74 Billion. Lockheed Martin 2018 projected cash flow at $6.7 Billion is good allowing the company to have the means for company growth and increasing the dividend each year.
- I also require the CAGR going forward to be able to cover my yearly expenses and my RMD with a CAGR of 8%. My dividends provide 3.3% of the portfolio as income, and I need 1.9% more for a yearly distribution of 5.2%. The three-year forward S&P CFRA CAGR of 13% meets my guideline requirement. This good future growth for Lockheed Martin can continue its uptrend benefiting from the continued sales growth of their defense products in the United States and foreign countries.
- My total return guideline is that total return must be greater than the Dow's total return over my test period. LMT passes this guideline since their total return is 167.20%, much more than the Dow's total return of 43.14%. Looking back five years, $10,000 invested five years ago would now be worth over $20,300 today. This makes Lockheed Martin a great investment for the total return investor looking back.
- One of my guidelines is that the S&P CFRA rating must be three stars or better. LMT's S&P CFRA rating is five stars or strong buy with a target price of $420, passing the guideline. LMT's price is presently 55% below the target. LMT is under the target price at present and has a relatively average PE ratio of 17, making LMT a good buy at this entry point with a steady dividend and earnings growth to continue. The present dip provides a good entry point to buy this great defense company at a discount.
- One of my guidelines is would I buy the whole company if I could. The answer is yes. The total return is great and the increasing dividend for 17 years makes a good combination of growth and income. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, makes a fair profit, invests profits back into the business and also generates a fair income stream. Most of all what makes LMT interesting is the long-term growth of the economy and defense budget giving you an increasing growth in the military sector.
Total Return and Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the portfolio. Lockheed Martin beat against the Dow baseline in my 60.0-month test compared to the Dow average. I chose the 60.0 month test period (starting January 1, 2014, and ending to date) because it includes the great year of 2017, and other years that had fair and bad performance. The great total return of 167.20% makes Lockheed Martin a great investment for the total return investor. Lockheed Martin has an above average dividend yield of 3.3% and has had increases for 17 years, making Lockheed Martin a good choice for the dividend income investor. The Dividend was last increased in September 2018 to $2.20/Qtr. or a 10% increase.
DOW's 60 Month total return baseline is 43.14%
Last Quarter's Earnings
For the last quarter on October 23, 2018, Lockheed Martin reported earnings that beat expected by $0.87 at $5.14, compared to last year at $3.232Total revenue was higher at $14.3 Billion more than a year ago by 16% year over year and beat expected revenue by $1.123 Billion. This was a good report with bottom line beating expected and the top line increasing with a good increase compared to last year. The next earnings report will be out January 2019 and is expected to be $4.76 compared to last year at $4.30 a good increase.
The graphic below shows the third quarter earnings, revenues, and cash flow highlights.
Source: Earnings call slides
Lockheed Martin is the largest manufacturers of military defense systems sold in the United States and foreign countries.
As per excepts from Reuters:
Lockheed Martin is a security and aerospace company. The Company is engaged in the research, design, development, manufacture, integration, and sustainment of technology systems, products, and services. The Company operates through four segments: Aeronautics; Missiles and Fire Control (MFC); Rotary and Mission Systems (RMS), and Space Systems. The Company also provides a range of management, engineering, technical, scientific, logistics, system integration, and cybersecurity services. Its main areas of focus are in defense, space, intelligence, and homeland security. The Company serves both the United States and international customers with products and services that have a defense, civil and commercial applications, with its principal customers being agencies of the United States Government.
The Aeronautics segment is engaged in the research, design, development, manufacture, integration, sustainment, support and upgrade of military aircraft, including combat and air mobility aircraft, unmanned air vehicles and related technologies."
Overall Lockheed Martin is a good business with 13% CAGR projected growth as the worldwide economy grows going forward with the increasing demand for LMT's military products. The F-35 program provides a strong base of ongoing sales for the best fighter jet in the world for years and years to come. The good earnings and revenue growth looking forward provides LMT with the capability to continue its growth as the defense business increases, and foreign sales are expanded.
The graphic below shows the 2018 sales projection by major product lines.
Source: Earnings call slides
The Fed has kept interest rates low for some years, and on December 19, 2018, they raised the base rate 0.25%, which was expected. I believe that they will go slow next year, which should help keep the economy on a growth path. If infrastructure spending can be increased, this will even increase the United States growth going forward with better economics for the consumer. The Fed lowered GDP projection for next year which may mean they are getting to neutral on the economy, projecting two rate increases for 2019. The recent volatility may keep the Fed on hold. Recently, the Fed Chairman made a statement which was dovish and the market went up strongly.
From October 23, 2018, earnings release Marillyn Hewson (Chief Executive Officer, President, and Chairman) said:
As today's release illustrates, we continue to outperform the goals we set at the beginning of 2018, with another quarter of strong operational accomplishments, important new business awards and outstanding financial results. We've seen strong financial performance across the entire corporation. And this performance, coupled with our improved outlook for the remainder of the year, has resulted in us updating our guidance again this quarter.
I'm especially pleased to see our earnings and cash expectations continue to grow as we remain focused on operational performance and delivering long-term value to shareholders. Our third quarter and year-to-date financial performance and improved full-year projections are the results of the strength provided by our broad portfolio of offerings as each of our 4 business areas contributed to our updated 2018 financial outlook.
We will discuss the financials in detail a little later in the call, but I do want to highlight two key actions that our Board of Directors took this quarter in the area of cash deployment. First, we increased the quarterly dividend by 10% to $2.20 per share or $8.80 annually, maintaining our long-standing commitment to a strong dividend. Second, we also increased our share repurchase authority by $1 billion, bringing total repurchase authority to $3.7 billion. This level of authority provides additional flexibility to continue to return cash to stockholders through share repurchases if market conditions and our fiduciary duties permit.
Together, these two actions demonstrate our continued strategy of balanced cash deployment and long-term commitment to delivering returns for our stockholders."
This shows the feelings of top management for the continued growth of the Lockheed Martin business and shareholder return with an increase in future growth. LMT has good constant growth and will continue as the world military budgets grow.
The graphic below shows the 2018 guidance for Lockheed Martin.
Source: Earnings call slides
Lockheed Martin is a good investment choice for the total return and income investor with its good projected growth as worldwide defense budgets increase and the company buys back shares. Lockheed Martin will be considered for The Good Business Portfolio to increase the group of growth companies. LMT gets a bit of an edge over other defense companies because it has a strong income and better growth prospects. If you want a steady growing total return and income, in the growing defense business LMT may be the right investment for you.
Recent Portfolio Changes
I intend to watch the earnings reports for the companies in the portfolio and may finally decide to trim my high flyers that are over 8% of the portfolio so I can invest in good companies on my buy list.
- On January 9 trimmed Mondelez (MDLZ) from 1.32% of the portfolio to 0.65%. The growth rate looks low going forward and the portfolio is looking at Lockheed (LMT) as a replacement.
- On November 19 the portfolio trimmed 3M from 1.4% of the portfolio to 0.92%. The last earnings report was fair but and the next year does show the growth that is wanted. I was going to sell this small position, but the recent market volatility makes me want to hold this defensive income position.
- On October 10 trimmed Home Depot (HD) from 10.1% of the portfolio to 9.6%. I love HD but don't want it to get above 10% of the portfolio.
- On October 10, the portfolio added starter position of VISA (V) at 0.4% of the portfolio.
- On August 22 increased the percentage of DLR to 3.3% of the portfolio, I want to get this REIT to a full position of 4%.
- On August 15 sold all remaining AmerisourceBergen (ABC) in the portfolio.
- On August 9, the portfolio reduced AmerisourceBergen to 0.4% of the portfolio. I will most likely sell the remainder of ABC next week. The company margin is very thin, and I don't like the present pressure of the opioid crisis. The risk has gotten too high versus the reward.
- On July 12, bought a small starter position (0.1% of the portfolio) in Simulation Plus (SLP) a small software company that helps test/simulate new drugs before they are released. SLP is a very speculative investment and should be watched carefully.
- On June 20, closed out covered calls and sold KHC position, I needed some cash. I got a better price using the calls but missed some of the recent gains.
- On June 8, sold KHC July 57.5 calls against the position and will make 4% if the KHC price remains the same. The calls are now in the money, and I may move them up and out when the time value is small.
- On May 14, I trimmed the position of Eaton Vance Enhanced Equity Income Fund II (EOS) from 9.2% of the portfolio to 8.9%. I still like EOS and don't want to overweight this fund which is high in technology companies.
The Good Business Portfolio trims a position when it gets above 8% of the portfolio. The four top companies in the portfolio are Johnson & Johnson (JNJ) is 8.8% of the portfolio, Omega Health Investors is 8.7% of the portfolio, Home Depot is 8.9% of the portfolio, and Boeing (NYSE:BA) is 13.2% of the portfolio. Therefore BA, OHI, JNJ, and HD are now in trim position, but I am letting them run a bit since they are great companies.
Boeing is going to be pressed to 14% of the portfolio because of it being cash positive on 787 deferred plane costs at $316 Million in the first quarter of 2017, an increase from the fourth quarter. The second quarter saw deferred costs on the 787 go down $530 Million a big jump from the first quarter. The second quarter of 2017 earnings was fantastic with Boeing beating the estimate by $0.25 at $2.55. The third quarter of 2017 earnings were $2.72 beating the expected by$0.06 with revenue increasing 1.7% over last year, another good report. The first quarter earnings for 2018 were unbelievable at $3.64 compared too expected at $2.64. Farnborough Air Show sales in dollar value just beat out Airbus (OTCPK:EADSY) by about $6 Billion, and both companies had a great number of orders. The second quarter earnings beat expectations by $0.06 at $3.33, but a good report was hurt by a write off expense on the KC-46 which should start delivery in 2019. Boeing received an order for 18 more KC-46A planes. As a result of the good third-quarter earnings, S&P CFRA raised the one-year price target to $ 450 for a possible 37% upside potential.
JNJ will be pressed to 9% of the portfolio because it's so defensive in this post-BREXIT world. Earnings in the last quarter beat on the top and bottom line and Mr. Market did like it. JNJ has announced a dividend increase to $0.90/Qtr, which is 56 years in a row of increases. JNJ is not a trading stock but a hold forever; it is now a strong buy as the healthcare sector remains under pressure.
For the total Good Business Portfolio, please see my article on The Good Business Portfolio: 2018 3rd Quarter Earnings and Performance Review for the complete portfolio list and performance. Become a real-time follower, and you will get each quarter's performance after this earnings season is over.
I have written individual articles on JNJ, EOS, GE, IR, MO, BA, PEP, AMT, PM, Omega Health Investors, Digital Realty Trust (DLR) and Automatic Data Processing (ADP) that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest, please look for them on my list of previous articles.
Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions of the companies are my own.
Disclosure: I am/we are long BA, JNJ, HD, OHI, MO, IR, DLR, GE, PM, MMM, ADP, PEP, SLP, EOS, MDLZ
Disclosure: I am/we are long BA, JNJ, HD, OHI, MO, IR, DLR, GE, PM, MMM, ADP, PEP, SLP, EOS, MDLZ. 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.