Building my Dividend Porfolio - Lockheed Martin

Karin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

This is part six of a ten-part series, which I will be publishing every week until the entire portfolio has been introduced. You can see Part One here, Abbott Laboratories; Part Two, PartnerRe Limited; Part Three, Enterprise Products Partners; Part Four, Cracker Barrel Old Country Store; and Part Five, Meredith Corp.

I have been analyzing dividend companies for over six months. I am halfway through constructing a model portfolio of my own that I am presenting to the Motley Fool community, one company at a time. Each week, I am digging deeper into individual companies that are at the top of my consideration list.

I review the companies on seven different criteria: yield, number of years paying and raising dividends, 5-year dividend growth rate (DGR), 5-year projected earnings growth rate (EGR), total return for the past twelve months, PE and payout ratio. I feel that this selection covers the past dividend-paying history, the potential future earnings growth, and the valuation of the company.

I constructed a rating system that awards points for each of the previous named criteria. A “perfect” score would be 28 points, with 4 points awarded in all seven categories.

The next company in my portfolio comes from the defense industry, which may or may not experience significant spending cuts from the U.S. Government over the coming years. However, at this point Lockheed Martin (NYSE: LMT) has received the highest score of the companies I have examined so far, with a total of 20 points.

Lockheed is a research and manufacturing company and is categorized in the Industrial Goods segment of the Aerospace/Defense Products and Services industry. The company designs and manufactures advanced technology systems for security and defense, for both military and commercial uses. The company was founded in 1909, is based in Bethesda,MD, and employs over 123,000 full-time employees.

Dividend Metrics

In terms of its potential as a dividend-generating stock, I look at the current dividend metrics. Lockheed’s yield is 4.9% and it has a 10-year history of consistently paying and raising dividends. The last raise in its dividend was Dec. 28, for an increase of 15%.  The company’s payout ratio is 48%, which is reasonable and allows for a bit of wiggle room if earnings disappoint.

Future Earnings Metrics

In terms of future earnings growth, the 5-year earnings growth rate (EGR) as estimated by the 22 analysts who cover the company is lower than its competitors, at 4.9%, as compared to the growth rate for the industry of 11.5% and for the sector of 13.8% (The S&P 500 5-year EGR is currently 9.1%). LMT’s earnings estimate for FY 2012 (results are expected to be announced on Jan. 24) is $8.41, compared to last year’s actual $7.85, an increase of 7%. The estimate for 1Q 2013 is estimated at 7% higher than 4Q 2012.

Valuation Metrics

The company has a TTM PE of 11.2, based on today’s price of approximately $94.  The average PE in the Industrial Goods sector is 14.2, and in the Aerospace/Defense Products and Services industry the average PE is 14.1.

Lockheed Martin is currently trading at about 2% less than its 52-week high of $95.92, and is up 14% from a year ago. Its twelve month total return is 20.8%.

Analyst Opinion

The Motley Fool community rates LMT a four-star CAPS pick, with 1,762 Bulls and 120 Bears (94% positive sentiment). The 22 professional analysts who cover the company rank it a 2.7 (1.0 = Strong Buy, 5.0 = Sell) with four Strong Buys, one Buy, fifteen Holds and two Underperforms. They have assigned a one-year average target price of $94.77, which is where the stock is currently trading.

Zack’s Equity Research held Lockheed Martin at Neutral in a blog post last week, citing the unknown consequences of the current budget-and-deficit battle among U.S. lawmakers, which may impact future Government spending, which made up 82% of Lockheed’s sales in 2011. However, on the positive side, they cited Lockheed’s strong balance sheet, its backlog order of over $75 billion through the first nine months of 2012, and the Obama administration’s focus on certain defense and intelligence technologies in which Lockheed excels.

Competition

I looked at another name-brand in the aerospace/defense industry, Boeing (NYSE: BA). It is currently trading at $76 per share and yields 2.6%. Although Boeing has been paying dividends since 1942, the company froze its dividend in 2010 and 2011, and only raised it 5% in 2012. The company has declared a raise in the dividend for 1Q 2013 of 10%, payable in March. The 5-year DGR is 4.8%, the EGR is 11.9%, the PE is 13.5 and the payout ratio is 31%. While the PE and earnings growth estimates are good, Boeing has too many flaws in its dividend metrics to make it a good candidate for my portfolio.

I also examined General Dynamics (NYSE: GD), another big player in the defense industry. It is currently trading at $70 per share and yields 2.9%. The company has been paying and raising dividends for 18 years, the 5-year DGR is 18.4%, the EGR is 5.1%, the PE is 10.6 and the payout ratio is 37%. In fact, the company scores a 17 on my dividend-scoring system, which is enough for the company to receive serious consideration for my portfolio. It would be disqualified if its PE stays below 3%, though. I will watch for a price drop or a dividend hike that would bring it within range.

Conclusion

Lockheed Martin has many strengths, including excellent historical dividend growth, a very attractive yield, a reasonable PE, and terrific growth over the past twelve months. It is now the sixth stock in my new dividend portfolio.

I will begin tracking it based on the closing price on the day that this article is syndicated.


khern0203 has no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics and Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus