Two Companies That Are Buying Their Shares, Should You?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are two companies buying back their shares on a consistent basis. They are both in the same industry. The companies both pay good dividends of over 3.5% and have good cash flow. The two companies are well known names and yet a lot of investors don't really give consideration to buying their shares. Would you like to know who these two companies are? I present to you Lockheed Martin (NYSE: LMT) and Raytheon (NYSE: RTN).
Before you click away from this post because these companies rely at least in part on Washington, DC, read the numbers below and let them sink in. How the military spends its money can mean a big win or a big disappointment to either company. That being said, both of these companies represent intriguing values at current prices.
Current Price: $84.58
P/E based on '12 earnings: 10.80
Growth expected: 7.57%
Lockheed has the higher dividend of the two companies, but the slightly lower growth expectation. The company has beaten analysts expectations by about 10% in 3 of the last 4 quarters. The expectation of future cuts in defense spending seems to be built into future estimates. Their full year '12 and '13 estimates have fallen by 2.6% and 5.6% respectively. Since Lockheed has been beating estimates prior to these revisions, it's not hard to imagine the company continuing this streak. Lockheed has been furiously buying back their shares. They have spent over $900 million in share repurchases in 3 of the last 4 quarters. The only concern about Lockheed is their balance sheet which shows an over 2:1 ratio of debt-to-equity. Their cash flow payout ratio on the dividend after capital expenditures is averaging about 44%. Lockheed has been consistently raising its dividend by an average of nearly 13% in the last 3 years.
Current Price: 48.99
P/E based on '12 earnings: 9.64
Growth expected: 8.16%
Raytheon has the higher growth prospects, but lower dividend. The company has about the same earnings profile as Lockheed. Raytheon has beaten earnings estimates by over 10% in 3 of the last 4 quarters. As with Lockheed, Raytheon's earnings projections have come down for '12 and '13 by 2.8% and 4.5% respectively. With Raytheon's recent history of beating expectations it's possible the company continues to beat these lowered forecasts. Raytheon has also been buying back shares to the tune of about $250 million a quarter. This is impressive because Raytheon's market cap is about 35% less than Lockheed. Raytheon's cash flow payout ratio after capital expenditures is about 43%, so the two companies couldn't be closer in that respect. Raytheon has also been raising its dividend by nearly 13% on average in the last 3 years. Where Lockheed has a 2:1 ratio of debt-to-equity, Raytheon comes in at a more reasonable 1:3 ratio.
Given these numbers I would take another look at these two defense industry stocks. Both companies are paying good dividends, raising their dividends, and buying back stock. If one company has a slight edge it might be Raytheon because of the better relative value of the shares, and the stronger balance sheet. Do your own due diligence and consider if the best offense is a good defense.
The Motley Fool owns shares of Lockheed Martin and Raytheon Company. MHenage has no positions in the stocks mentioned above. 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.