Company Description: Lockheed Martin Corp., the world's largest military weapons manufacturer, 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 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 57.7% premium to its calculated fair value of $289.43. LMT did not earn any Stars in this section.
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 one Star in this section for 1.) 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. The company has paid a cash dividend to shareholders every year since 1995 and has increased its dividend payments for 21 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
The NPV MMA Diff. of the $342 is below the $1,400 target I look for in a stock that has increased dividends as long as LMT has. If LMT grows its dividend at 6.6% per year, it will take 6 years to equal a MMA yielding an estimated 20-year average rate of 3.75%.
Peers: The company's peer group includes: Boeing Co. (BA) with a 0.0% yield, Northrop Grumman Corporation (NOC) with a 1.6% yield and Raytheon Technologies Corporation (RTX) with a 2.7% yield.
Conclusion: LMT did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks LMT as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $299.06 before LMT's NPV MMA Differential increased to the $1,400 minimum that I look for in a stock with 21 years of consecutive dividend increases. At that price the stock would yield 4.1%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,400 NPV MMA Differential, the calculated rate is 10.6%. This dividend growth rate is higher than 6.6% used in this analysis, thus providing no margin of safety. LMT has a risk rating of 2.00 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 52%, from 35%. Its debt to total capital increased to 65%, from 49%. LMT is trading at a premium to my calculated fair value of $289.43. For now, I will wait for a more opportune time to add to my position.
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 (2.7% of my Dividend Growth Portfolio).
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