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Defense giant Lockheed Martin (NYSE: LMT) is fighting through a difficult environment of declining defense spending in the United States. But that has not held the company back so far this year. In fact, Lockheed Martin’s earnings have held up very well, as has its stock price. Shares of Lockheed Martin are up 5% year to date, while the S&P 500 index is down 9% so far this year.
Its sound fundamentals allowed Lockheed Martin to recently increase its dividend by 10%. Lockheed Martin generates a lot of free cash flow, and is counting on a major acquisition to keep profits and dividends shooting higher for years to come.
A Free Cash Flow Machine
Lockheed Martin’s fundamentals have held up well this year. Last quarter, the company reported $11.6 billion of revenue, exceeding analyst estimates, which called for $10.9 billion. Earnings per share came in at $2.94 per share, representing 7% year-over-year growth, and significantly beat expectations as well.
Because the company does not need a lot of cash to fund ongoing capital expenditures, it generates a lot of free cash flow. Lockheed Martin raked in $3 billion of free cash flow last year, which was more than enough to reward shareholders with$1.7 billion of dividends and $1.9 billion of share buybacks.
The company is off to a good start this year, as it totaled $1.9 billion of free cash flow over the first half of the year. The Lockheed Martin dividend cost the company $965 million in that time, which results in a modest 50% free cash flow dividend payout ratio.
Looking up ahead, Lockheed Martin has growth in its cross hairs. This will be achieved primarily through acquisition, as the company is prepared to buy the Sikorsky Aircraft business from United Technologies (NYSE: UTX) for $9 billion.
Lockheed Martin management is confident this deal will add to earnings growth going forward, as the Sikorsky business will complement Lockheed’s existing portfolio. This should result in significant cost synergies.
And, the deal will increase Lockheed Martin’s exposure to international markets, which will be crucial to keep growing earnings, especially if defense spending declines in the United States. To that end, half of Sikorsky’s annual revenue comes from international markets.
Firing On All Cylinders
Because of its strong free cash flow, Lockheed Martin can return a great deal of cash to shareholders. Including its most recent raise, the Lockheed Martin dividend has been raised by 17% compounded annually over the past five years. The company has now come through with 13 consecutive years of double-digit dividend increases, on a percentage basis.
Lockheed Martin will increase its dividend to $6.60 per share annualized. The stock now provides investors with a solid 3.2% yield, which is significantly above the stock market average. The company buys back a lot of stock as well. Lockheed Martin recently announced an additional $3 billion stock buyback authorization.
Lockheed Martin generates a lot of free cash flow and maintains a conservative payout ratio, which means double-digit dividend growth could still be attainable over the next several years. For its high dividend growth and a strong 3.2% yield, Lockheed Martin looks attractive for income investors.
Dividends for Every Month of the Year
If you’re looking for just one dividend stock to round out your income stream, consider a little-known company that pays out dividends 12 months of the year.
Click here to see the full details of this company in my Dividend Calendar…