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My FI Journey » Stock Analysis » Lockheed Martin Corp (LMT) Dividend Stock Analysis

Lockheed Martin Corp (LMT) Dividend Stock Analysis

lockheed martinLockheed Martin Corp (LMT) is the world’s largest military weapons manufacturer.  Lockheed Martin receives 82% of its sales from the US governement, 17% from foreign governments, and 1% from other areas.  Overall, LMT is divided into four business segments.  1) Aeronautics, which primary produces fighter planes such as the F16, and accounts for 31% of revenues.  2) Electronic Systems, which makes a variety of  products for command, control, communications,
intelligence, surveillance and reconnaissance (C3ISR), and accounts for another 31% of revenues. Some of the products from this business unit include the Aegis fleet defense missile system and other tactical missile systems.  3)  Space Systems, which producs satellites and more missile systems, accounts for 18% of revenues.  This business unit is also responsible for producing products for NASA’s next generation space program.  And 4) Information Systems & Global Services, which produces a variety of information technology products for the military, accounts for 20% of revenues.  LMT is also home to the legendary Skunk Works research and development program.

Lockheed Martin Corp Basic Company Stats

  • Ticker Symbol: LMT
  • PE Ratio: 10.54
  • Yield: 5.20%
  • % above 52 week low: 48.7%
  • Beta: 0.61
  • Market cap: $28.5 B
  • Website: www.lockheedmartin.com

LMT vs the S&P500 over 10 years

lmt sp500 comparison

LMT has basically matched the S&P500 over the last decade.  Sometimes it has performed a bit lower, and sometimes a bit higher.  By the end of 2012, an investment in LMT would have only been slightly higher than the S&P500 as a whole.

LMT Earnings Per Share (EPS) & Dividend Growth

LMT eps div

  • 5 year EPS growth: 1.6%
  • 10 year EPS growth: 15.2%
  • 5 year dividend growth: 22.7%
  • 10 year dividend growth: 24.4%

EPS for Lockheed Martin appear to have leveled off over the last 5 years.  However, LMT’s dividends have been blazing upwards.  The 10 year dividend growth rate was 24.4%, the 5 year growth rate as 22.7%, and the one year growth rate is 27.7%.  Unless EPS begins to grow substantially, I wonder how many more years this accelerated dividend growth can continue before it starts to level off.

With a starting yield of 5% and a growth rate of about 20%, LMT’s yield on cost will grow to well over 25% in 10 years. Considering a more conservative growth rate of 10%, the yield on cost will grow to about 11.5% in 10 years.  In order to double the dividend, using the rule of 72 and the more conservative 10% growth rate, it will take approximately 7 years.

LMT Payout Ratio

lmt payout ratio

LMT’s payout ratio has remained below40% for eight of the last 10 years.  The average payout ratio over the last 10 years is 31%.  Over the last two years the payout ratio has creeped up to 50% as dividend payments have increased while earnings have remained flat.  Based on where the payout ratio is now, I feel that there is still some room for aggressive dividend growth, but without a substantial increase in earnings dividend growth will have to slow down in the future.

LMT Cash Flow per share and Revenue

LMT cash flow per share

  • 10 year revenue growth (2003-2012): 4.5%
  • 5 year revenue growth (2008-2012): 2.5%
  • 3 year revenue growth (2010-2012): 1.5%

This section makes me a little bit pessimistic.  LMT’s revenue growth has clearly been declining.  Cash flow per share increased substantially until about 2007, when it started leveling off.  I couldn’t find complete data for 2012 when I wrote this, but it’s a fair bet that cash flow stayed about the same.  If LMT cannot increase revenue and cash flow faster than it currently is, LMT will not be able to sustain the aggressive dividend growth of it’s past.

LMT Balance Sheet

The long term debt to capitalization ratio for 2011 is ~86.6%.  Once again, I could not find complete 2012 data on LMT.  Overall the Debt to Equity ratio has been very high over the last 10 years, often over 100%.  I worry about a company that carries this much debt.  But clearly the company has been very successful.

LMT Risks

LMT carries two main risks.  First, the winding down of US Defense spending means that LMT’s revenue will likely remain flat.  Increased production of the F35 fighter jet and sales to foreign governments may offset some of the losses.  Second, LMT carries a substantial amount of debt.  It should be noted that the company has historically carried a lot of debt and remains successful in spite of it.

LMT Valuation Panel

Graham Number

The Graham number represents one very simple way to value a stock.  Unfortunately, due to LMT’s substantially high debt load, the book value is not meaningful and a Graham number cannot be calculated.

Two Stage Dividend Discount Model

Using a discount rate of 10%, the beta of 0.61, an initial dividend growth rate of 20% for 5 years, and a terminal dividend growth rate of 7%, the two stage dividend discount model produces a value of $97.92.  LMT still appears undervalued, but changing the inputs of the model subtly, will produce different valuation numbers.

LMT Cash Secured Puts

I like LMT as a company, but based on it’s fundamentals I suspect that growth will be flat-ish.  The stock price will likely be driven entirely by the performance of the stock market as a whole over the next year.  This idea is supported by LMT’s beta and it’s 10 year performance vs the S&P500.  Since I’m not sure if this current rally has legs I wouldn’t consider a lont-term cash secured put at this time.

Conclusions

I like LMT a lot as a company.  I think that their dividend growth is going to be slowing down over the next few years as their revenue and EPS levels off.  But given how high the starting yield is, LMT should be able to produce some nice returns.  I would consider initiating a small position in LMT at this time.

Disclosure: I am long LMT.

Readers:  What are your opinions about Lockheed Martin?

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20 Responses to "Lockheed Martin Corp (LMT) Dividend Stock Analysis"

  1. Thanks for the review of LMT. I’ve made two purchases of LMT so far. I am waiting to see how the defense spending shakes out this year and may buy more shares later in the year. You have to love that 5%+ dividend yield!

    1. The 5% yield, the fact that LMT is likely undervalued, and the fact that I need more industrials are all compelling reasons for me to buy.

  2. Do you think that LMT will take a hit if the military cuts go into effect? If so, do you think that would create an opportunity to buy the stock? Or do you believe that losses would continue for a longer period?

    1. I thought about that. If you think of the military like a business, then the two biggest cost drivers are employees and inventory.

      I would imagine that employees (soldiers) will be cut first as the Wars in Iraq and Afghanistan wind down. Afterwards I can imagine inventory taking a hit.

      The open question is whether the kinds of advanced systems made by LMT will be among those cut. Yes, I think that they will be cut, but as there are efforts underway to modernize other parts of the military, LMT has some room to expand.

      My opinion is that LMT will drop a bit in the short term, but that the drop won’t be crushing. In the long-run, I see LMT remaining a major supplier of military equipment.

  3. Martin says:

    LMT is another great stock. Having it in my watch list and saving for its purchase.

  4. Laurie says:

    I am loving the education about stocks here. The worry about defense spending cuts seems valid, but it also sounds like LMT has no serious competition, correct? Maybe foreign sales may rise?

    1. In the short term I see defense spending as an issue. But over the long term probably not. There aren’t that many companies, and I suspect that a major part of defense cuts will involve discharging soldiers over cutting back on equipment.

  5. LMT was in my list of stocks to look at as I try to expand our dividend portfolio. But I do not really understand defense spending and how it affects the company. So I have stuck with Science, Tech and finance companies so far. I have to diversify.

    1. I don’t claim to understand the ins and outs of defense spending either. But our government is basically a fire-hose of tax payer (and borrowed) money. Might as well get some of that back in the form of dividends.

  6. Maverick says:

    This is my employer! Buy the stock and drive it up as I’m looking to sell some of my shares :)

  7. Monster Piggy Bank says:

    I don’t like how leveraged they are to the US government and so I would probably look elsewhere myself.

    1. I can see how their dependance on the US government could be a concern, but I don’t see defense spending going anywhere but sideways or more likely up in the long-term.

  8. I’m a little worried about the DG. If you use the analyst forecast for EPS growth and a 9% DGR in 10 years the payout is near 80% so unless EPS can grow faster I don’t see great DG continuing. However, I also don’t expect the “budget cuts” to really make that big of a difference for LMT. Defense will continue to get more and more automated and that’s right up LMT alley.

    1. I doubt that the “budget cuts” will make much of a difference.

      That’s a pretty good observation about the dividend growth, but as the military modernizes, as it’s going to have to, LMT stands to capitalize on that.

  9. Integrator says:

    I like that LMT operates in a relatively concentrated industry with high barriers to entry. My concern also is possible spending cuts, and a slowly climbing, though not alarming, payout ratio.

    1. MFIJ says:

      The climbing payout ratio is a concern of mine as well. But only time will tell. The dividend is pretty high so I’m expecting growth to slow down a bit, but remain acceptable.

      The spending cuts are going to wind up being all smoke and no fire. Our government is gifted when it comes to spending money, so this is nothing but a speedbump in the long-game.

      From the diversification front, I now own GD and LMT – two main military suppliers. It’s likely that I’ll search for some non-defense stocks to help round out the industrials sector of my portfolio.

  10. [...] producing aeronautics, electronics, space, and information systems for military use.   See my recent analysis of LMT for more [...]

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