Big Dividend Defense with Rocket Potential
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Volatility. Uncertainty. Austerity. These are just some of words to describe the current investing environment. One of the ways to successfully navigate this terrain is to find companies with large dividends and relatively stable and consistent business models. For this, we turn to Lockheed Martin (NYSE: LMT), a security and aerospace company with a long history of consistency and growth.
Valuation and Dividend Protection
Lockheed Martin currently has a P/E just over 10, low given its history of steady growth and its position as a leader in the global defense space. Lockheed Martin also has a very high 4.8% dividend yield and plenty of operating cash flow to pay it out. The dividend provides known income that also protects your downside risk. For companies with such high yields, there is only so far down the stock will go before buyers step in because of the yield.
As an example, I use Intel (NASDAQ: INTC) from last fall, when Intel had a 4% dividend at its $20 price. At the time, investors were concerned about Intel keeping up with the competition in the mobile device market and being able to survive in a shrinking PC market. These pessimistic investors failed to see the value and growth in the rest of Intel's business. Intel fell through the $20 level briefly but has since had an excellent run higher up to $27.50, a 37.5% gain, after reporting multiple quarters of better than expected results. Lockheed Martin having such a high dividend payout affords it similar protection on the downside against much of its worries.
The big overhang in the stock has resulted from concerns about cuts in defense spending. That concern is certainly valid given the tone and temperature in Washington, D.C. at the moment. On the most recent conference call, management was very outspoken against the automatic budget cuts that could occur because the super-committee couldn’t reach a deal. These cuts could be devastating if they actually happen. However, one thing that everyone in Washington everyone seems to agree on is that these automatic cuts cannot happen. The ultimate level of desired defense spending varies based upon whom you ask, but I have not heard anyone refute the notion that the automatic spending cuts would severely compromise our nation's defense. It's difficult to envision a scenario in which the government does nothing to avoid the budget cuts that would automatically take place in 2013.
Furthermore, tensions around the globe show no signs of easing. Though the U.S withdrew heavily, Iraq still has issues. Iran continues to be a big concern, at least enough to rattle Israel’s cage and involve the U.S. in diplomacy. We haven’t heard too much from North Korea in a while, but that could change quickly. And the list could go on to include potential allies for any of these countries.
Therefore, while there is very valid concern about defense spending cuts, there are also reasons that spending cuts might never take place and could turn into spending increases if needed. Unfortunately, we won't likely see a resolution to the issue of automatic budget cuts anytime soon. Congress is not likely to address this issue prior to the November elections. Therefore, we'll probably get stuck with a lame-duck congress trying to sort this out before the deadline early in January 2013.
Lockheed Martin has a long history of good results despite numerous times when investors were concerned about the company taking a haircut from government tightening. They consistently beat the consensus earnings estimates and provide a fantastic dividend while you wait for them to repeat their success. At this moment, Lockheed Martin has a 4.8% dividend worth banking on while all of its bad news is baked into the stock price. If the stock can return to only having a 4.0% yield, then its price would jump up to $102.50, producing a roughly 20% gain.
Zaegs has no positions in the stocks mentioned above. The Motley Fool owns shares of Intel and Lockheed Martin. Motley Fool newsletter services recommend Intel. 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. If you have questions about this post or the Fool’s blog network, click here for information.