Looking For Income In September? Take A Look At Lockheed Martin
Many companies choose to pay shareholders dividends during the months of March, June, September and December. In September alone, more than 750 companies will pay investors who hold their shares. In October, the number of companies handing out cash drops to 560. By November, that total drops to 465. Investors who would like extra income from now until the end of the year could do well by buying shares of a company that pays a dividend during the 3rd, 6th, 9th and 12th month of the year. By doing so, not only would they lock in a dividend payment in September, but in December as well.
That being said, investors would be foolish to buy shares of a company simply because of when they pay their dividends. A company’s fundamentals, business environment, dividend history and valuation have to be taken into account before one hits the “buy” button. One of my favorite companies right now that checks all of these boxes, and just happens to be paying a dividend in September, is Lockheed Martin (LMT).
Company Background and Current Business Environment
With $51 billion in sales in 2017, Lockheed Martin is the world’s largest defense contractor. The U.S. Department of Defense accounts for 60% of the company’s revenues, with the remainder split between several different U.S. agencies and foreign governments around the world.
Lockheed Martin consists of four divisions: Aeronautics, which houses fighter aircraft like the F-35, Rotary & Mission Systems, which produces naval electronics and the Sikorsky helicopters that the company purchased from United Technologies (UTX) in 2015, Missile & Fire Control, which produces missile defense systems, and Space Systems, which create satellites.
The defense sector has been one of the hottest places to invest in recent years. The Aerospace & Defense ETF (ITA) is up nearly 150% in the last five years. The S&P 500 is up ~90% during this time frame. Lockheed Martin is up nearly 210%, easily beating both the market index and the defense sector ETF.
The reason for these gains for the defense sector in general and Lockheed Martin in particular is due to the increases in government spend on defense. The U.S. is expected to increase its defense spending in fiscal year 2019 by more than $110 billion from fiscal year 2018 levels.
The world is a dangerous place. Reports show that North Korea is continuing with its nuclear weapons program and Iran could possibly become a threat to Middle East security now that the U.S. has pulled out from the nuclear deal that President Obama helped put together. Due to these and other conflicts around the globe, defense spending is likely to continue to grow over the next few years.
As the top defense contractor, Lockheed Martin is likely to be the beneficiary of any increase in defense spending. Not only that, the company’s most recent earnings release showed that the business is doing very well and deserves to be considered the best company in the defense sector.
Recent Earnings Results
Lockheed Martin released results for the second quarter on July 24. The company earned $4.05 per share. This was $0.13 ahead of the average analyst’s estimate and a 25% increase from the prior year. Lockheed Martin’s revenue grew nearly 7% to $13.4 billion. This total topped estimates by $600 million.
Outside of Space Systems, whose sales dropped just 1%, every division within Lockheed Martin saw revenue growth. Aeronautics had sales growth of 8.1% in the quarter. Fiscal 2018 saw the U.S. government add funding for an additional twenty F-35 fighter jets and seventeen C-130 transport aircraft. Sales for Rotary & Mission Systems increased 4%. Funding for an additional sixteen Blackhawk helicopters was added to the government’s fiscal 2018 budget. Missiles & Fire Control saw high volume growth for the division’s THAAD missile defense system, driving revenue increases of 17% year over year.
After lifting guidance following first quarter results, Lockheed Martin increased its earnings and revenues guidance for 2018 after the most recent quarter. The company now guides towards an earnings per share midpoint of $16.95 for the year, up from $15.95 previously. Revenue is now expected to top $52 billion for the year, up from $51 billion earlier.
The company’s earnings results show that Lockheed Martin’s business is performing very well in the current environment. Let’s examine the company’s dividend track record and valuation to help determine if now is the correct time to purchase shares.
Dividend History and Valuation
Lockheed Martin has increased its dividend for the past fifteen years. Of all the Aerospace & Defense companies, only General Dynamics (GD) has a longer dividend growth streak. Over the last decade, Lockheed Martin has increased its dividend by an average of 17.6%. Dividend growth has slowed slightly in recent years (five-year average increase is 12.4%), but the company still offers generous increases, including last year’s nearly 10% increase. If Lockheed Martin stays true to form, investors will likely be given their next raise at the end of September. Shares currently yield 2.5%, well above that of the S&P 500 (1.8%), but below that of the 10-year Treasury Bond (2.8%). Note: In order for investors to receive September’s dividend, they must own the stock by August 31.
Based off of the midpoint for expected earnings for 2018 and the recent share price of $324, Lockheed Martin currently has a price to earnings multiple of 19.1. Over the past five years, the stock’s average P/E has been 17.1. While the stock is slightly overvalued relative to their recent historical P/E, shares offer a much better value than the S&P 500 as a whole, which sports a P/E north of 25 currently.
Given the amount of spending on defense products and Lockheed Martin’s “best in breed” status amongst companies in this sector, I find the stock to offer a very good value at current prices. Factor in that there remains time to capture not one, but two dividend payments in 2018 and this could be a good opportunity to acquire shares of Lockheed Martin.
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