Dividend Investor Portfolio #6: Partners in Arms
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Dear Investor,
Welcome to the 6th edition of TipRanks’ Dividend Investor Portfolio & Newsletter.
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Market-Moving News: April 29, 2024
Stock markets were in rollercoaster mode last week, which was the busiest in terms of earnings releases in the current reporting season. As mega- and large-cap firms provided quarterly outcomes, jittery investors read into every word, trying to establish whether they should adjust positions.
So far, about 30% of the S&P 500 firms have reported their first-quarter results, with about three-quarters of them beating earnings forecasts. However, in the current nervous market environment, stocks are rewarded less than usual for beating estimates, while those that miss elicit a far worse reaction. Moreover, investors are placing an exceptionally strong focus on guidance as they try to establish whether stocks have more room to run amid overstretched valuations, higher-for-longer interest rates, and geopolitical risks.
The macroeconomic data delivered another blow to investor sentiment last week, as it reflected a slowing economy and persistent inflationary pressures. This week, the markets will focus on other important economic reports, particularly labor-market numbers, to try and gain some clues about the Federal Reserve’s further actions.
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This Week’s Quality Dividend Stock Idea
Lockheed Martin Corporation (LMT) is the world’s third-largest aerospace and defense company. However, it is by far the largest corporation in the defense-only space, with its defense revenues far exceeding all of its U.S. and global competitors.
The company traces its roots to 1912, the foundation year of two businesses – Martin Marietta Corporation and the Lockheed Aircraft Company – which merged in 1995 to form Lockheed Martin. Today, with a market capitalization of $111 billion and annual revenue of $67.6 billion, LMT is a global defense leader, ranking #60 on the Fortune 500 list of largest U.S. corporations by revenue.
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Global Defense Leader
LMT operates through Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space segments. The Aeronautics division, responsible for approximately 40% of total revenues, offers combat and air mobility aircraft, unmanned air vehicles, and related technologies; it is the unit that produces the F-35 fighter jets. The Missiles and Fire Control segment, which provides about 16.5% of the company’s annual revenue, sells well-known air and missile defense systems, such as HIMARS and PAC-3 Missiles, among others.
The Rotary and Mission Systems, with approximately 24% of revenue, offers military and commercial helicopters (including Sikorsky Black Hawk), surface ships, sea and land-based missile defense systems, radar systems, and other systems. The Space segment, responsible for about 19% of total revenues, provides national security, civil, commercial, and weather spacecraft, strategic and missile defense solutions, and hypersonic missions, among others.
The company also offers cybersecurity systems for governments and military, advanced autonomous defense systems, machine learning (ML) and artificial intelligence (AI) defense applications, and other cutting-edge tech.
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Military Spending Boost
Headquartered in the Washington, D.C. area, the company is synonymous with advanced military technology. Although almost all of its segments supply some civilian-use products and technologies, Lockheed Martin derives 96% of its revenues from its defense operations. LMT’s extensive product portfolio and constant focus on innovation (roughly half of its employees are scientists and engineers) have made it a standard-setter in the defense landscape.
On April 23rd, the company reported its Q1 2024 results, handily beating estimates on revenue, operating profit, and earnings-per-share. Lockheed also said that its order backlog stood at almost $160 billion at the end of the quarter and included several large National Security Space contracts. The company continues to see increased demand for its fighter jets and missile systems.
While Lockheed’s management reiterated its positive but cautious outlook for the rest of the year, it may need to upgrade it soon based on several positive tailwinds. Lockheed Martin has recently beat its competitors to a $17 billion contract with the U.S. Missile Defense Agency to develop the next generation of interceptors for the defense against ballistic missiles. In addition, the company secured a $102 million modification contract for the U.S. Navy.
In addition, the company’s order book is expected to benefit from the newly approved Israel and Ukraine aid packages, as these will be spent on F-16 and F-35 jets, HIMARS, Hellfire missiles, and other military equipment and munitions. U.S. sales of military equipment to foreign governments have reached a record in 2023. Judging by recent developments the trend is expected to continue, benefiting Lockheed’s revenues.
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Strong Dividend Track Record
Lockheed Martin has been paying dividends since its formation in 1995, increasing them annually in the past 21 years. The latest such increase was in November of last year when the payout was hiked by 5%. In the past decade, LMT’s dividend has increased at a CAGR of 9%.
The company’s current dividend yield of 2.7% is already much higher than the sector average and is expected to grow at a CAGR of 5% to 7% in the next several years. This outlook is supported by Lockheed’s moderate payout ratio of 44%, as well as its strong business and cash generation capabilities.
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Total Return in Focus
LMT’s shareholder compensation goes far beyond dividends, as it is known for aggressive stock buybacks. In October 2023, the company authorized an addition of $6 billion to its existing share repurchase program, increasing it to a total of $13 billion. In 2023, Lockheed bought back its shares for the amount of roughly $6.9 billion. In the decade prior to 2023, the company has repurchased about 20% of its stock.
Since Lockheed mainly supplies governments through long-term contracts, its revenue streams are stable and predictable. However, for this reason, they can generally not be expected to display strong growth. Such is also the case with LMT’s stock performance. However, its dependably rising dividends and share “cannibalization” have supported its stock. As a result, LMT’s stock has outperformed the S&P 500’s total return (with dividends reinvested for both) in the past decade.
In the past 12 months, Lockheed’s shares declined ~3%, mostly due to the policymakers’ wrangling over the proposed defense budget for 2025, as the lion’s share of Lockheed’s revenue stems from the U.S. government contracts. However, the stock is now indicating a rebound, thanks to strong earnings and other positive news.
Meanwhile, LMT trades at a significant discount when compared to its sector, while sitting at the bottom of the valuation range for its defense peers. Furthermore, based on projected cash flows, the company trades about 30% below its fair value, placing it firmly within the value category.
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Investing Takeaway
Lockheed Martin is much larger than its peers in the Aerospace and Defense industry, with a far wider economic moat. It pays the largest dividend among comparable firms, while its payouts are deemed the safest and most reliable among peers. At the same time, it has displayed the fastest EPS growth in the past year and is expected to continue to award shareholders in the years to come through stable performance, increasing dividends, and continuing with its share repurchase strategy. Taking all this into account, we believe that LMT’s low valuation provides a perfect opportunity to include this defense champion in long-term income portfolios.
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Dividend Investor Portfolio
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Portfolio News
¤ Philip Morris (PM): The stock surged after the company released its Q1 2024 results, featuring sales and earnings that surpassed analysts’ expectations. Bank of America analysts assigned PM a new “Buy” rating with a price target implying an upside of over 10% in the next 12 months. At the same time, Stifel Nicolaus raised its price target on the stock, forecasting an upside of 18%.
¤ Grocery giants Kroger (KR), a Dividend Portfolio company, and Albertsons (ACI), announced their amended divestiture plans, which feature sales of stores and other assets. These plans are a step forward to their long-awaited merger and are being implemented to address antitrust regulators’ concerns.
¤ Edison International (EIX) will report its Q1 2024 results on April 30th. Analysts expect it to deliver a 7% year-over-year increase in earnings-per-share on higher revenues.
¤ Automatic Data Processing (ADP) will report its fiscal Q3 2024 results on May 1st. The company is expected to post an 11% year-over-year increase in EPS.
¤ Qualcomm (QCOM) is expected to deliver an 8% year-on-year growth in EPS in its fiscal Q2 2024, which will be reported on May 1st. Its earnings growth is expected to accelerate down the road, according to Benchmark Co. analysts, as they believe it is well-positioned to capitalize on a shift to GenAI smartphones and AI PCs.
¤ Amgen (AMGN) will report its Q1 2024 results on May 2nd. Analysts expect it to report a decline of 2.5% in EPS, bucking the trend of the previous three quarters which featured strong earnings increases. However, earnings volatility is normal within the biotech sector, and the company’s long-term investment case remains intact.
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Recent Trades
None at the moment, although we are considering adding a stock to our portfolio. Stay tuned.
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Portfolio Attributes
| Dividend Portfolio Yield |
Dividend Growth Rate | Annual Dividend Income |
| 3.70% | 8.03% | $3,698.00 |
| Yield-on-Cost Adjusted |
Weighted Growth | Equal-Weight 100K Portfolio |
Current Portfolio
| Name | EX-Dividend Date | Payment Date | Dividend Yield | Annual DPS |
| Automatic Data Processing (ADP) | Jun 14, 2024 | Jul 01, 2024 | 2.16% | $5.60 |
| Allianz SE ADR (ALIZY) | May 08, 2024 | May 13, 2024 | 4.38% | $1.50 |
| Amgen (AMGN) | May 16, 2024 | Jun 07, 2024 | 3.23% | $9.00 |
| BlackRock (BLK) | Jun 07, 2024 | Jun 23, 2024 | 2.68% | $20.40 |
| Edison International (EIX) | Mar 27, 2024 | Apr 30, 2024 | 4.29% | $3.12 |
| JPMorgan Chase (JPM) | Apr 04, 2024 | Apr 30, 2024 | 2.20% | $4.60 |
| Kroger (KR) | May 14, 2024 | Jun 01, 2024 | 2.02% | $1.16 |
| LyondellBasell (LYB) | May 30, 2024 | Jun 06, 2024 | 5.03% | $5.00 |
| Philip Morris (PM) | Jun 22, 2024 | Jul 11, 2024 | 5.82% | $5.20 |
| Qualcomm (QCOM) | May 30, 2024 | Jun 20, 2024 | 2.03% | $3.40 |
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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
