- Lockheed Martin stock is an excellent candidate for a diversified, large-cap dividend stock portfolio.
- Recent budget trends have been supportive for the industry.
- The average target price of the top analysts is at $229.50. However, in my opinion, Lockheed Martin stock price could go much higher.
Lockheed Martin (NYSE:LMT), the world's largest military weapons maker, has been able to achieve some growth in 2015 despite budget-cutting headwinds. In 2014, the company derived 79% of its net sales from the U.S. government, including the Department of Defense (DoD) as well as non-DoD agencies. The company has continued to succeed amid reduced U.S. government spending, though growth in earnings has recently been driven by cost cuts, a pension plan restructuring, and share buybacks. However, recent budget trends have been supportive for the industry. In December 2015, Congress passed an FY16 defense budget of $573 billion, $38 billion higher than the base recommendation. Department of Defense forecasts calls for additional increases of 2% through 2020. The 2016 budget includes modernizing investments in areas such as nuclear deterrence, missile defense, cyber security and power projection.
In my view, Lockheed Martin stock is an excellent candidate for a diversified, large-cap dividend stock portfolio. The company recently raised its dividend by 10%. The annual dividend yield is pretty high at 3.03% with a payout ratio of 53%. The annual rate of dividend growth over the past three years was at 14%, over the past five years was very high at 18.4%, and over the last ten years was also very high at 19.3%. I consider that besides dividend yield, the consistency and the rate of raising dividend payments are the most crucial factors for dividend-seeking investors, and Lockheed Martin's performance has been excellent in this respect. All in all, the company generated $5.1 billion cash flow from operations, and $4.2 billion free cash flow in 2015, and returned a record of $5.0 billion to shareholders through dividends and share repurchases.
Source: 4th Quarter 2015
Year-to-date, Lockheed Martin stock is up 0.4% while the S&P 500 Index has declined by 0.4%, and the Nasdaq Composite Index has lost 4.7%. Moreover, since the beginning of 2012, Lockheed Martin stock has gained an impressive 169.5%. In this period, the S&P 500 Index has increased 61.9%, and the Nasdaq Composite Index has risen 83.2%. According to TipRanks, the average target price of the top analysts is at $229.50, an upside of 3% from its March 30 close price. However, in my opinion, Lockheed Martin stock price could go much higher.
On January 26, Lockheed Martin reported its fourth quarter and full year 2015 financial results, which beat EPS expectations by $0.07 (2.4%). Revenues increased 3.1% from $12.5 billion a year ago to $12.9 billion in the fourth quarter, beating the consensus estimate of $12.1 billion by 6.7%. All segments, except Space Systems and Information Systems & Global Solutions, registered year-over-year sales growth. Lockheed Martin showed earnings per share surprise in all its five last quarters, as shown in the table below.
Source: 4th Quarter 2015
The company achieved record backlog of $99.6 billion, including $15.6 billion for Sikorsky. Lockheed Martin completed its acquisition of Sikorsky Aircraft for $9.0 billion on November 6. Excluding the acquired Sikorsky backlog, the rest of the company's portfolio backlog hit $84 billion, significantly surpassing the $80 billion goal it outlined at the beginning of 2015. According to the company, its backlog positioned it to deliver expanding sales levels and financial results as it moves forward in 2016 and beyond. What's more, since LMT's book-to-bill ratio is pretty high at 1.09, I believe that the company will show significant growth in 2016.
Source: 4th Quarter 2015
I assume continued strong earnings for the company based on increased U.S. and international defense spending. Lockheed Martin is focusing on international revenue diversification, and international contracts continue to flow in, particularly for air defense and F-35. In my view, increased geopolitical tensions will benefit sales and earnings going forward. According to the company, the new Department of Defense budget is a recognition of increasing global security requirements and the need to allocate additional fiscal resources to respond to the threat environment. An essential element in the increased DoD budget is a double-digit annual percentage increase in the investment accounts to fund new equipment procurement and research and development activities.
Lockheed Martin has been able to excel despite budget-cutting headwinds. However, recent budget trends have been supportive for the industry. In my view, Lockheed Martin stock is an excellent candidate for a diversified, large-cap dividend stock portfolio. The company recently raised its dividend by 10%, and the annual dividend yield is pretty high at 3.03%. The average target price of the top analysts is at $229.50, presenting an upside of 3% from its March 24 close price. However, in my opinion, Lockheed Martin stock price could go much higher.