Company Description: Lockheed Martin Corp. is the world's largest military weapons manufacturer, and is also a significant supplier to NASA and other non-defense government agencies. LMT receives about 93% of its revenues from global defense sales.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value (see page two of the linked PDF for a detailed description):
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
LMT is trading at a discount to 1.) and 3.) above. Since LMT's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 22.9% discount to its calculated fair value of $109.33. LMT earned a star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics (see page two of the linked PDF for a detailed description):
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
LMT earned two Stars in this section for 1.) and 3.) above. A star was earned since the free cash flow payout ratio was less than 60% and there were no negative free cash flows over the last 10 years. LMT earned a star for having an acceptable score in at least two of the four Key Metrics measured.
Rolling four-year dividend greater than 15% means that dividends grew on average in excess of 15% for each consecutive four-year period over the last 10 years (2001-2004, 2002-2005, 2003-2006, etc.). I consider this a key metric since dividends will double every five years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1995 and has increased its dividend payments for nine consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high-yield MMA. Two items are considered in this section (see page two of the linked PDF for a detailed description):
1. NPV MMA Diff.
2. Years to > MMA
LMT earned a star in this section for its NPV MMA Diff. of the $53,640. This amount is in excess of the $2,600 target I look for in a stock that has increased dividends as long as LMT has. The stock's current yield of 3.85% exceeds the 3.1% estimated 20-year average MMA rate.
Memberships and Peers: LMT is a member of the S&P 500. The company's peer group includes: Boeing Co. (NYSE:BA) with a 2.3% yield, Northrop Grumman Corporation (NYSE:NOC) with a 3.4% yield and United Technologies Corp. (NYSE:UTX) with a 2.4% yield.
Conclusion: LMT earned one star in the fair value section, earned two stars in the Dividend Analytical Data section and earned one star in the Dividend Income vs. MMA section for a total of four stars. This quantitatively ranks LMT as a 4-Star Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $233.71 before LMT's NPV MMA Differential increased to the $2,600 minimum that I look for in a stock with nine years of consecutive dividend increases. At that price the stock would yield 1.39%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,600 NPV MMA Differential, the calculated rate is 8.7%. This dividend growth rate is well below the 17.9% used in this analysis, thus providing a margin of safety. LMT has a risk rating of 2.25 which classifies it as a Medium risk stock.
LMT is the largest defense contractor in the world and dominates next-generation defense platforms. It owns supply contracts for key programs such as the F-35, which assure multiple years of revenue. However, U.S. budgetary concerns and the requirement for the U.S. Department of Defense to reduce spending by $350 billion over 10 years (possibly expanded to $950 billion) could negatively affect LMT's ability to increase its dividend.
I am also concerned with the company's recent increase in its debt to total capital. As a mitigating factor, its net debt is only $2.5 billion when subtracting out the $4.5 billion of cash. Given these concerns, I will not add to my position at this time even though LMT trades below its calculated fair value of $109.33.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in LMT (0.6% of my Dividend Growth Portfolio) and long in UTX. See a list of all my dividend growth holdings my income holdings here.
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