Lockheed Martin: A Must Buy Dividend King

| About: Lockheed Martin (LMT)

In addition to elegant jets, giant aircraft bodies, Staggerwings, Supermarines and Falcons of the Aerospace world, people are also attracted by the healthy dividend yields that the defense industry has to offer. In the long list of dividend paying aerospace stocks, Lockheed Martin (NYSE:LMT) is our most preferred name.


The stock has a dividend yield of 4.91%. The company has a rich history with regards to dividend payments. From time to time, the company has been increasing its dividends. Around September end, the company increased its dividend from $1/ share to $1.15/share. The forward dividend yield of the stock came out to be 4.97%.

3rd Quarter Earnings

On October 24, LMT reported third quarter EPS of $2.21. This was well above the consensus EPS of $1.85. The company also topped revenue estimates. However, revenue of $11.9 billion (above the $11.2 billion consensus) was down 2.1% YoY.

Much to investors' delight, LMT raised its revenue outlook by $500 million to $45.5-46.5 billion. EPS outlook was raised to $8.20 - $8.40, from $7.90 - $8.10. The company is also expecting improved liquidity through a rise of $125 million in forecasted operating profits. The operating profits for the year are now expected to be in the range of $4.15-$4.25 billion.


According to an earlier plan, Obama's administration had planned to implement budget cuts in the next term, which was an ominous sign for the whole of the industry. The administration planned to cut $400 billion in the next decade, with a $55 billion cut for each year. However, Obama surprised everyone when he recently vowed in a campaign address that he will do everything to stop the sequestration. This has sent bullish signs to the market. Had this not happened, the budget cuts would have meant a major restructuring of the whole industry, as smaller fish would have joined with the large fish to gather the remaining orders in the market.

In the earnings release, LMT provided preliminary guidance for 2013, based on the assumption that sequestration would not take place and Congress would approve a fiscal budget which is consistent with the President's proposed budget. The company expects revenue for 2013 to slip by a low single-digit figure, from the figure for 2012. Also, the company expects the operating margin to remain above 11%.

Shares Repurchase

LMT repurchased 3.3 million shares worth $294 million during 3Q12 and $708 million year-to-date. The company stated, during a conference call, that it expects to return cash to shareholders in the form of dividends and share buybacks, but it did not give specific guidance. During the first half of the year, the company used $428 million to repurchase 4.9 million shares. Up till now, the company has used a total of more than $4 billion to buy back more than 48 million shares. The current Outstanding Shares figure stands at 323 million.

Cash Flows And Debt

Free Cash Flows, after CAPEX and dividends, was $1.0 billion in 3Q12, significantly higher than the $64 million in 3Q11. On YTD basis, FCF was $1.38 billion through 3Q12, down from $1.83 billion a year ago. Cash reserves increased sequentially by $850 million, to $4.65 billion. Cash flow from operations is expected to be greater than $4 billion for the year, an improvement from the current of $3.96 billion.

Debt/EBITDA was flat at 1.3x for this quarter. The total debt was $6.5 billion, and net debt was $1.87 billion in 3Q12. Debt is not a big issue for the company. The only debt maturing till 2016 is one worth $150 million, maturing in 2013.


LMT has truly been a dividend king. The following chart shows the historical trend in dividends:

Dividends have grown by almost 23.36% over the last 5 years. This quarter was a good one for LMT with robust cash flows and an improved operating margin. The company did not declare a CAPEX policy due to the uncertainty in the economic environment, as the issue of sequestration still remains unresolved. The company is trading at a forward P/E of 11x. With 7% per annum growth expected in earnings for the next 5 years and a solid dividend yield, the stock is recommended as a buy.

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

Business relationship disclosure: The article has been written by Qineqt's Aerospace Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.

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