Stock of the Week
NYSE Symbol: LMT
Industry: Aerospace & Defense
Price as of 9/28: $93.38
The third quarter comes to a close and what a quarter it's been. The S&P 500 rose 5.8% in the quarter, up 14.5% for the year. September, typically the worst month of the year, turned in one of its' best showings in a long time with only a handful of down days and only one triple digit decline. In fact, in the last year, the major averages have only returned one down month, the month of May. The last time the major averages went through a 12 month cycle with only one down month goes all the way back to 1959. Virtually all stocks and sectors are up for the year which makes it hard to find undervalued stocks. One of the reasons the major averages have performed as well as they have is due to the Federal Reserve and the European ECB. The Fed went from QE3 to QE infinity to help revitalize the economy. The Fed wants to keep interest rates low for another two to three years which is good medicine for an ailing economy, but not helpful to investors seeking income. Investors have been forced to move out the risk profile moving away from Treasuries and CDs, to more volatile, but high yielding bonds, including junk bonds. Dividend paying stocks have already caught a bid as an alternative to bonds for investors in need of income. This week we'll highlight a company that hiked their dividend 15% bringing the total yield to 5% just this week. The stock of the week is Lockheed Martin. Lockheed Martin, the second largest aerospace & defense contractor and the best dividend paying stock in its sector is well situated verse its peers amid almost certain defense cuts. The mounting Federal deficit and pending "Financial Cliff" could hit the defense sector hard with major cut backs to the tune of half a trillion dollars over 10 years and $55 billion in the first year alone, (Lockheed get 82% of its revenue from the government). The defense sector is obviously not without its risks, but any investor looking for income and exposure to the aerospace and defense sector, should take a hard look at Lockheed and its' 5% dividend.
Lockheed, which builds F-35 and F-16 fighter jets, Aegis missiles and coastal warships, posted better-than-expected second-quarter net profits while also raising its forecast for operating profit in the full 2012 year to $4.025-$4.125 billion from $3.9-$4.0 billion, or by 20 cents a share to $7.90 to $8.10a share. Although, management conceded it still faces challenges ahead with $500 billion in additional U.S. defense spending cuts due to start next year. In the second quarter, Lockheed noted 3 out of their 4 businesses grew year over year. Earnings from continuing operations gained 11.2 percent to $2.38 per share from $2.14 a year earlier. Net sales rose 3.3 percent to reach $11.9 billion in the quarter, up from $11.5 billion in the same quarter of 2011. Lockheed said cash from operations during the second quarter fell 5.5 percent to $845 million, after pension contributions of $607 million, from $894 million in the same quarter of 2011, when pension contributions amounted to $325 million. Lockheed said they have ERISA funding requirements for next year at around the $1.1 billion for pensions. The defense industry is experiencing a huge amount of uncertainty, especially for a long term industry like defense. Lockheed is trying to model internally what "might" happen, rather than what "will" happen. Lockheed affirmed its forecast of $45 billion to $46 billion in revenues and raised its forecast for cash from operations by $100 million to $3.9 billion. Analysts said the improved cash guidance bodes well for Lockheed's future dividend payments, which are already higher than most other defense companies. Fast forward to this week, Lockheed hiked their dividend by 15% for a total yield of 5%. Not bad.
Even though the stock trades just under its 52 week high, the current valuation for Lockheed Martin remains attractive. The stock trades for 11 times earnings and 0.6 times sales. The company has nearly $4 billion in cash with $6.5 billion in total debt. The company continues to generate strong cash flow with room to continue the dividend hikes. The defense and aerospace industry are in a tough spot with the pending fiscal cuts, but given the political upheaval worldwide, Israel and Iranian tensions, Lockheed is likely to continue to be a long-term winner of government contracts and a fan favorite among investors due to that 5% dividend yield.