War & Dividends by Lockheed Martin

When I began putting together this blog covering the fourth stock listed on our September Dividend-a-Month Club list, I couldn’t help but recall an episode of Seinfeld. In the episode that came to mind, Elaine was scheduled to meet with a famous Russian author. After being told about the upcoming meeting, Jerry jokingly told her how Tolstoy’s original title to his masterpiece War and Peace was, indeed, War, What is it Good For?

For Lockheed Martin investors, war is good for dividends — and lots of them. In fact, since the United States military invaded Iraq in 2003, Lockheed Martin has increased its dividend from $0.44/share to more than $3 (estimated $3.15) in 2011. The company has increased its dividend for nine straight years at an average compounded rate of 20% per year. My problem with this company is its dependence upon the U.S. Government for its revenues. Approximately 85% of the company’s revenues currently come from the federal government and it is my opinion that our federal government is broke.

Current Dividend Yield

Of the five dividend-paying stocks included on our Dividend-a-Month Club list for September, Lockheed Martin is currently in a tug-a-war with Intel for the highest dividend yield. Currently, Lockheed Martin is on top with a yield of 4%, slightly higher than Intel’s 3.8% yield. While the current dividend yield is an important factor to consider, it is not the only factor. Equally, if not more, important is the company’s history of growing its dividend, as well as its ability to maintain that growth, going forward.

Dividend Growth History

To be included in the First Share Dividend-a-Month Club, a company must have raised its dividend each year of the previous five years and Lockheed Martin fills that requirement. As previously mentioned, Lockheed Martin has raised its dividend for 9 consecutive years and during that period has increased its dividend by an average of 20% per year (compounded).

Dividend Sustainability

This is the category that worries me the most as it relates to Lockheed Martin. While I don’t feel that the company’s dividend is in jeopardy in the short-to-medium term, I am extremely pessimistic on the fiscal health of the U.S. government, going forward. With 85% of its revenues coming from federal spending, Lockheed Martin’s dividend could come under pressure over the longer-term. With total debt in excess of $14 trillion, the U.S. government will eventually be forced to drastically cut spending. In 2010, defense spending totaled over $700 billion, or 14.5% of total government spending. Only spending on social programs such as Social Security and Medicare exceeded defense spending.

I am convinced that significant reforms in Social Security and Medicare will not come until it is too late. That leaves defense spending as the only other category where enough spending can be cut to actually make a difference. The good news for Lockheed Martin investors is that global warfare is likely to only increase in the near-term.

I don’t believe that the fighting is nearing an end, however. History shows that recessions are followed by war.

So, the “good news”, for lack of a better phrase, for Lockheed Martin investors is that the wars and the fighting are not likely to end anytime soon.

Regardless, Lockheed Martin is on track to pay out only approximately 50% of its free cash flow as a dividend during 2011. While that is above its 11-year average of 29%, it’s still not too high. Keep in mind, also, that the company is in the process of developing one of its newest fighter planes – the F-35. This is a capital intensive process which will likely inflate the company’s payout ratio in the short-term.

Yield-to-Cost Explained: If you were to buy shares in Lockheed Martin at its current price of $76.04 and received $3.15 per share in dividends, your yield-to-cost would be 4.1%. Yield-to-cost is determined by simply dividing a company’s dividend by the investor’s average cost basis in a stock. Assume, for example, that Lockheed Martin were to continue to increase its dividend by its long-term average rate of 20% per year. By 2016 it would be paying an annual dividend of $7.83 per share. If you paid $75.06 per Lockheed Martin share today and held the stock through 2016, you would essentially be receiving a dividend yield (on your investment) of 10.4% in 2016.


Lockheed Martin has a solid history of paying a dividend and has increased its dividend every year for that past nine years. Its payout ratio, while not low, is reasonable at approximately 50%. I do think its dividend could be threatened in five-to-ten years or so as defense spending must decline, but I don’t think it is in danger in the near-term. Therefore, investor’s who purchase the stock at current prices could see their yield-to-cost rise significantly over the course of the next several years.

Lockheed Martin shares are offered as part of the First Share Program for DRIP Investors!

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