Over in this thread, bobbyboy1970 asks if Lockheed Martin (LMT) is a buy. In talking about dividend growth, I said:
Since early October of 2012, I've made a handful of small purchases of LMT at an average price per share of $91.52 (including commissions). I started buying it around $94, and as the price dropped into the mid-80s, I picked up a few more shares here and there to average down my price.
I think LMT Has a lot going for it as a DG stock. For starters, as mentioned above, the dividend growth profile has been excellent in recent years. It has a reasonably strong streak of raising the dividend for 10 years in a row now, and even with the aggressive raising of the dividend in more recent years, the payout ratio for 2012 was still under 50 percent. With a P/E ratio in the 10 to 11 range, I am very comfortable with the valuation.
The weak link in the LMT story, and this is not trivial, is earnings growth. The five-year average earnings growth is less than 5 percent. If you look all the way back to 2007, LMT earned $7.00 per share that year, which makes 2012's $8.36 look underwhelming. I've seen estimates of 2013 earnings per share at $8.80, which is certainly moving in the right direction, but at more or less the same slow pace seen recently. Without earnings growth, it is hard to count on long term dividend growth.
So how has LMT fueled the stellar dividend growth that I discussed earlier? The answer is in the payout ratio. In 2008 the payout ratio was around 24 percent, in 2009 it was just over 30 percent, in 2010 it grew to 37 percent, then 41 percent in 2011, and all the way to 49 percent in 2012. As I said above, a payout ratio around 50 percent does not give me pause, but for LMT to keep growing the dividend at anything close to the rate they have been, without a corresponding growth in earnings, the payout ratio will only continue to climb. The situation is far from grim, but it is also simply not long term sustainable. My guess -- and it is nothing more than that -- is that starting as early as this year, they will be more conservative with the dividend raises. Still, if you buy today, your starting yield is just about exactly 5 percent, which is not too shabby, so even if the raises are less aggressive than in the past, you'll do just fine.
As to the intangibles, LMT has some positives and negatives. I generally like to invest in more simple business models that have less overhead -- business that I could imagine running myself. (Think tobacco company or Pepsi.) LMT is far from that. On the other hand, LMT has a very nice advantage in that much of its revenue comes from government spending. Talk about the sequester all you want, but the world does not seem to be getting a whole lot more peaceful, and I think governments are going to keep buying the drones and joint strike fighters and the hundreds of other military / aerospace doodads that LMT makes.
On balance, for all of these reasons, I am happily long with LMT as about 5 percent of my portfolio.
Quote:It is a rare stock indeed that has a high current yield and that is also growing the dividend at a fast pace year over year. One example of this is Lockheed Martin (LMT). Currently yielding a generous 5 percent (approximately), LMT has also been growing the dividend at an average rate of over 20 percent each year for the last five years. There are other reasons to think twice about LMT (sequester, earnings trajectory), but it is hard to argue with LMT’s winning combination of dividend growth factors.
Since early October of 2012, I've made a handful of small purchases of LMT at an average price per share of $91.52 (including commissions). I started buying it around $94, and as the price dropped into the mid-80s, I picked up a few more shares here and there to average down my price.
I think LMT Has a lot going for it as a DG stock. For starters, as mentioned above, the dividend growth profile has been excellent in recent years. It has a reasonably strong streak of raising the dividend for 10 years in a row now, and even with the aggressive raising of the dividend in more recent years, the payout ratio for 2012 was still under 50 percent. With a P/E ratio in the 10 to 11 range, I am very comfortable with the valuation.
The weak link in the LMT story, and this is not trivial, is earnings growth. The five-year average earnings growth is less than 5 percent. If you look all the way back to 2007, LMT earned $7.00 per share that year, which makes 2012's $8.36 look underwhelming. I've seen estimates of 2013 earnings per share at $8.80, which is certainly moving in the right direction, but at more or less the same slow pace seen recently. Without earnings growth, it is hard to count on long term dividend growth.
So how has LMT fueled the stellar dividend growth that I discussed earlier? The answer is in the payout ratio. In 2008 the payout ratio was around 24 percent, in 2009 it was just over 30 percent, in 2010 it grew to 37 percent, then 41 percent in 2011, and all the way to 49 percent in 2012. As I said above, a payout ratio around 50 percent does not give me pause, but for LMT to keep growing the dividend at anything close to the rate they have been, without a corresponding growth in earnings, the payout ratio will only continue to climb. The situation is far from grim, but it is also simply not long term sustainable. My guess -- and it is nothing more than that -- is that starting as early as this year, they will be more conservative with the dividend raises. Still, if you buy today, your starting yield is just about exactly 5 percent, which is not too shabby, so even if the raises are less aggressive than in the past, you'll do just fine.
As to the intangibles, LMT has some positives and negatives. I generally like to invest in more simple business models that have less overhead -- business that I could imagine running myself. (Think tobacco company or Pepsi.) LMT is far from that. On the other hand, LMT has a very nice advantage in that much of its revenue comes from government spending. Talk about the sequester all you want, but the world does not seem to be getting a whole lot more peaceful, and I think governments are going to keep buying the drones and joint strike fighters and the hundreds of other military / aerospace doodads that LMT makes.
On balance, for all of these reasons, I am happily long with LMT as about 5 percent of my portfolio.