Lockheed 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 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
- 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’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
- 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 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
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.
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?