Company Description: Lockheed Martin Corp. is the world's largest military weapons manufacturer, and 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 2 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 premium to all four valuations above. Since LMT's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 24.5% discount to its calculated fair value of $335.71. 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 2 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 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2006-2009, 2007-2010, 2008-2011, etc.) I consider this a key metric since dividends will double every 5 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 14 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 2 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 $6,339. This amount is in excess of the $2,100 target I look for in a stock that has increased dividends as long as LMT has. If LMT grows its dividend at 15.0% per year, it will take 1 years to equal a MMA yielding an estimated 20-year average rate of 2.79%. LMT earned a check for the Key Metric 'Years to >MMA' since its 1 years is less than the 5 year target.
Peers: The company's peer group includes: Boeing Co. (BA) with a 3.4% yield, Northrop Grumman Corporation (NOC) with a 1.6% yield and United Technologies Corp. (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 $397.93 before LMT's NPV MMA Differential decreased to the $2,100 minimum that I look for in a stock with 14 years of consecutive dividend increases. At that price the stock would yield 1.7%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,100 NPV MMA Differential, the calculated rate is 11.0%. This dividend growth rate is less than 15.0% used in this analysis, thus providing a significant 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 assures the company multiple years of revenue. In spite of spending cuts, the company continues to receive contracts from the Dept. of Defense. Going forward, its varied product offerings, operating execution and cost reduction measures will help the company to sustain its profitability.
Since the last review, the company's free cash flow payout increased to 44%, from 41%. Its debt to total capital also increased to 86%, from 83%. LMT is trading at a discount to my calculated fair value of $335.71. As such, I will continue to look for opportunities to add to my position, as my allocation allows.
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 (2.4% of my Dividend Growth Portfolio). See a list of all my Dividend Growth Portfolio holdings here.
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Tags: LMT, BA, NOC, UTX,