Lockheed Martin Corporation (LMT, Financial) has been a value creator both in terms of stock appreciation and high dividend payout. In the last year, the stock has trended higher by 18% and the company currently has a dividend payout of $6 per share. This article discusses why the strong dividend payout will sustain and why Lockheed Martin will continue to deliver strong results in the coming years.
Starting with the point on revenue sustainability, Lockheed Martin had a total order backlog of $80.5 billion as of December 2014. This includes $43.3 billion in new orders during FY14. Considering the company’s FY14 revenue of $45.6 billion, Lockheed Martin had nearly two years of revenue visibility.
Further, on net sales for $45.6 billion as of FY14, Lockheed Martin generated an operating cash flow of $3.9 billion. This implies an operating cash flow visibility of $6.9 billion considering the order backlog as of FY14. Therefore, in the coming quarters, Lockheed Martin is likely to report stable revenue and cash flow. In other words, the company’s dividend is sustainable in the coming years.
Another important point to note is that Lockheed Martin has a capital expenditure of $1.7 billion as of FY14 and this implied a free cash flow of $2.1 billion for the last year. I believe that the company’s free cash flow will remain robust and this will help reduce the company’s leverage or buyback shares as the company has done in the last few years.
Overall, the company’s order backlog, cash flow visibility and balance sheet strength ensures that Lockheed Martin can potentially increase dividends in the coming years. I rate the stock as one of the best dividend stocks and I have this opinion because of the industry Lockheed Martin is catering.
Coming to the factors besides the strong financials and dividends, I believe that Lockheed Martin is an increasingly global company and that will trigger steady growth in order book for the company. To put things into perspective, 79% of the company’s sales for FY14 were from U.S. Department of Defense. International sales, which were around 20%, are likely to increase to 25% in the coming years. In FY14, Republic of Korea selected F-35 for its defense needs and signed a LoI for 40 aircraft. With increasing geo-political tensions globally, the company global sale is likely to expand in the coming years.
It has been observed in the recent past that cyber security has become one of the biggest concerns for governments and corporate. Lockheed Martin has made inroads in the cyber security division with the acquisition of Industrial Defender, a leader in cyber security solutions in the oil and gas, utilities and chemical industries. In the IT security, analytics and forecasting tools, the company also acquired BEONTRA and Systems Made Simple. The point I am trying to make is that Lockheed Martin is expanding its presence globally as well as in associated sectors. While the revenue contribution from these acquisitions will not meaningfully impact growth immediately, it sets the stage for long-term growth in sectors that will be in demand.
Another segment that warrants discussion is the company’s space systems, which generated $8.1 billion in sales for FY14. The segment is involved in extensive research and development, and I believe that the prospect for space system growth is very meaningful in the coming years.
One of the key advantages for Lockheed Martin is that there are high barriers to entry in the industry, and the company is a well-established player. There was speculation that lower defense spending budget in the United States would trigger downside for defense-related companies. However, considering the global geopolitical scenario, I don’t see a slowdown in sales. I must add here that the company’s client list includes Israel and Saudi Arabia. The latter (in particular) has ramped up defense spending in the recent past considering the scenario in the Middle-East.
In conclusion, Lockheed Martin is an excellent stock to own with sound fundamentals, high free cash flow and robust shareholder returns. For YTD15, the stock has moved sideways and I believe that this is a good long-term accumulation opportunity. Considering a strong order backlog and continued demand for its products from US and international governments, an EV/EBITDA valuation of 10.5 and a forward (FY16) PE of 15.0 looks attractive. Further, the company has a low beta of 0.56 and I recommend low beta stocks in an uncertain global environment.
