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Stock Analysis: Lockheed Martin

Lockheed Martin Corporation engages in the research, design, development, manufacture, integration, operation, and sustainment of advanced technology systems and products in the United States and internationally. The company has raised dividends for eight consecutive years, and is a potential dividend achiever. The latest dividend increase was in September, when the board of directors authorized a 19% dividend increase to 75 cents/share.

Over the past decade, this dividend stock has delivered a total return of 9.90% annually. The stock is still 40% off its all-time-highs reached in 2008.

Over the past decade, Lockheed Martin managed to increase earnings per share from a loss of $1.05 in 2000 to a profit of $7.78 in 2009. The company has bought back 1.50% of its shares outstanding on average over the past decade. The company has spent almost twice as much in cash on buybacks as opposed to dividends over the past few years. Analysts project Lockheed Martin to earn $7.40 in FY 2010 followed by $7.65 in FY 2011.

The company’s largest customer is the US Government, which accounted for 85% of Lockheed’s revenues. The large deficits that the government is running might limit future spending on the military. The possible ending of the conflicts in Iraq and Afghanistan could also potentially hurt defense budgets in the future, which could hurt sales at Lockheed. Another risk for the company is the government favoring other defense companies over Lockheed, which is the largest defense company in the world.

The company has managed to raise its annual dividend at a rate of 20.40% annually over the past decade. At 20%, dividends double every 3 and half years. The company actually cut dividends by 50% in the year 2000, but it had lost its status of a dividend achiever a few years before that. Currently, the company can afford to grow distributions given the low payout ratio. However without growth in earnings, the company’s future dividend growth will be limited.

The company’s dividend payout ratio has remained below 40% since 2002. Right now the dividend is sustainable at payout ratio of 30%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

The return on equity has steadily increased over the past decade, fueled by strong earnings growth. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Overall I find Lockheed Martin (LMT) to be attractively valued at a P/E of 8.80 and a yield of 4.30%. In comparison, rival Boeing (BA) trades at a P/E of 48 and yields 2.50%, while Northrop Grumman (NOC) trades at a P/E of 9 and yields 3.10%. Another defense contractor, Raytheon (RTN) trades at a P/E of 10.60 and yields 3.40%.

However it is still too early to consider adding Lockheed Martin to my dividend portfolio, particularly due to the ten year requirement for dividend growth that I have. I have no doubt that Lockheed would be able to join the dividend achievers in 2012, but its future would depend on whether it could boost earnings in the future.

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