November has been a busier month than usual for me as far as purchasing equity goes. What can I say, the holiday season is upon us and it has me getting into the holiday spirit, which for me translates into spending more money in the stock market. Such a waste of my hard-earned dollars, I know. 😉
After initiating a position in Starbucks at the beginning of the month, I recently switched gears and went shopping in an industry that couldn’t be more different than the coffee-selling one. As you’ve probably guessed from the title of this post, I decided to invest some capital in none other than the aerospace & defense sector.
On 11/24/2015 I purchased 2 shares of Lockheed Martin at $226.02/share, initiating a position for a total investment of $452.04.
According to Morningstar:
“Lockheed Martin is the largest defense contractor in the world and is the undisputed leader in next-generation fighter aircraft after being awarded the F-35 program in 2001. Lockheed generated $45.6 billion in 2014 revenue through four segments that span weapons to information technology to satellites: aeronautics (32% of 2014 sales), missiles and fire control (17%), mission systems and training (16%), information systems and global services (17%), and space systems (18%). Roughly 60% of sales come from the Department of Defense, 20% from other U.S. government agencies, and 20% from international customers.”
It doesn’t take an expert to see that we live in an increasingly dangerous world, where terrorism, conflict, and cyber attacks are becoming the norm; the recent Paris attacks were a grim reminder of this undeniable fact.
As such, I have a bullish view on the defense sector and I think that now is a good time to make a play on companies such as Lockheed Martin and Raytheon, who I believe are poised to benefit greatly from the horrific but unfortunately very real evils of mankind over the coming years.
As always, all the data I use to calculate stuff is pulled from Morningstar.
When looking at a company’s revenue growth, I like to compute the compound annual growth rate over 10-year, 5-year, and 3-year periods. This allows me to see whether or not the business has been growing over time and it also shows me whether the growth has been accelerating or decelerating in recent years. Here’s what the picture looks like for Lockheed Martin:
Things certainly don’t look great here. Revenue seems to have been fairly flat over the last 5 years, even dipping into the negative on a 3-year annualized basis. However, one thing to keep in mind is that U.S. military spending has been relatively weak since the Budget Control Act of 2011, which called for a lot of cuts. So, while Lockheed Martin has seen its total contract volume decline during the past few years, this is only a temporary situation.
As I mentioned previously, given the growing threats of terrorism around the world, it is hard to foresee a future in which defense spending won’t increase. In fact, the UK has already has already pledged to boost anti-terrorism spending by 30 percent over the next decade, including an order of 138 of Lockheed Martin’s flagship F-35 Lightning II jets.
EPS growth is another important metric to look at because it will give you a better picture of a company’s financial health. Revenue growth is nice and dandy, but if net income isn’t increasing proportionally, then there’s clearly something wrong going on. Let’s check out Lockheed Martin’s EPS growth over the last decade:
Unlike revenue growth, EPS growth seems to have been much better, hovering around the 10% mark on both a 10-year and 3-year annualized basis. This has been due in part to Lockheed Martin’s aggressive share buyback over the past few years, which tells me that management is confident in the company’s future.
The debt-to-equity ratio will tell you if a company has been using a lot of leverage to finance its growth. Acceptable numbers here will vary depending on the industry you’re dealing with, with some sectors like the financials sector being notorious for their high levels of debt.
Lockheed Martin’s debt-to-equity ratio clocked in at 1.81 in 2014, which isn’t too bad. It’s certainly not stellar, but it’s not terrible either.
Interest Coverage Ratio
Another important ratio I like to look at is the interest coverage ratio, which you get by dividing a company’s earnings (before taxes, interest, rainbows, etc.) by its interest expenses. I usually like to see a number above 5 here, preferably even 10, though again this can vary significantly depending on the industry we’re dealing with.
Lockheed Martin’s interest coverage ratio sat at 16.46 in 2014, which is quite healthy. It definitely paints a better picture of the company’s liabilities than its debt-to-equity ratio does.
The yield currently floats around 2.92%, which is quite nice. Stocks that yield around 3%-4%, coupled with a strong dividend growth rate, make me very happy. So on that note, let’s take a look at Lockheed Martin’s dividend growth rate!
Dividend Growth Rate
Dividend growth rate is one of the most important factors to look at as a dividend investor. It’s easy for dividend investors to get caught up in chasing high yields, but dividend growth is just as important (if not more).
Wow, Lockheed Martin certainly boasts an impressive DGR! Even though the growth seems to have been decelerating a bit in the last 3 years, to be able to maintain a growth rate in the vicinity of 16%-20% for over a decade is certainly nothing to sneeze at. I definitely like what I’m seeing here. 😀
Lockheed Martin sports a healthy 53.3% payout ratio, giving it plenty of room to continue increasing its dividend well into the future.
I used a DDM (Dividend Discount Model) to valuate the stock, with a discount rate of 10% and a very conservative dividend growth rate of 7.5% (that’s less than half of the current 3-year CAGR). This gives me a fair value of $258, which means that I purchased the stock at a 12% discount or so; not bad!
I certainly can’t complain there.
Lockheed Martin is a leader in the fields of aerospace defense and security, and I believe that the current state of the world provides a lucrative opportunity for investors to profit from an ever-increasing need for bleeding-edge, counter-terrorism technology.
What’s your opinion of Lockheed Martin? Do you agree that investing in the defense industry as a play on the world’s current global conflicts is a good move? Feel free to share your thoughts in the comments.
Disclosure: long LMT