Lockheed Martin Corporation (LMT) Dividend Stock Analysis

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.

Full Disclosure: None

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High Income Stocks for a Dividend Growth Portfolio

Most of my articles on dividend investing contain a fair bit of warning about the dangers of high dividend stocks. This has caused several readers to question whether I should include high yielding stocks in their portfolios or not. In this article I would try to explain the advantages and disadvantages of these securities, and let readers decide for themselves whether they suit their investment objectives.

First, I find stocks with above average yields helpful for retirees or future retirees who expect to start living off dividends up to the next 10 years. While dividend growth stocks are a great investment vehicle for the long run, it might take some time for them to start generating a sufficient yield on cost. For example it might take over a decade for a stock like Wal-Mart (WMT) with a current yield of 2% that raises dividends by 12% annually to reach a yield on cost of 8%. For the investor who needs to put food on the table for the next decade, Wal-Mart will likely be ignored due to its low yield in favor of a higher yielding stock such as Kinder Morgan Energy (KMP) or Royal Dutch Shell (RDS.B). A stock with a higher current yield which raises dividends minimally or not at all would provide the best yields for the next few years, provided that the company generates strong cash flows to support the distribution. If the investor simply chases high dividends without checking for their sustainability, they will be better off in cash and short –term maturities, rather than risk their principal on untested investments. If the distributions are sustainable, then the high dividend stock could be bought and held for current income.

Second, it is imperative to understand that a high dividend stock that doesn’t raise its distributions for a long period of time would result in lower inflation adjusted income over time. This is particularly concerning in the event that the investor spends their whole income, and doesn’t reinvest a portion of distributions. That’s why investors should hold only a portion of their income portfolio in high yielding stocks. They should invest the other portion in dividend growth stocks which offer consistent dividend increases. This dividend growth should be supported by a solid business model that generates sufficient cash flows to grow and maintain the business and also return excess cash to owners. The dividend growth component of the portfolio should be quietly working in the first decade or so in order to reach higher yields on cost. This is the component that will ensure that the income stream maintains its purchasing power for the whole retirement, no matter whether it last for one decade or half a century.

As a result, if you look at dividend yield from the viewpoint of your dividend portfolio, one could realize that individual company yields do not matter as much, as long as overall portfolio yield is enough to generate sufficient initial income stream. After that knowing that the addition of a 2% yielder that grows distributions at 15% annually won’t affect overall yield too much, the decision to add a stock like Becton Dickinson (BDX) or Family Dollar (FDO) is much easier that before.

The high dividend stocks which I currently own to supplement my current dividend income, until my future growers increase dividends enough include:

National Retail Properties, Inc. (NNN) is a publicly owned equity real estate investment trust. The company is a member of the dividend achievers index, and has raised distributions for 20 years in a row. The stock yields 5.70% ( analysis)

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company is a member of the dividend achievers index, and has raised distributions for 16 years in a row. The stock yields 5.00% ( analysis)

Royal Dutch Shell PLC (RDS.B)operates as an oil and gas company worldwide. The company explores for, and extracts crude oil and natural gas. The stock yields 5.40% ( analysis)

Kinder Morgan Energy Partners, L.P. (KMP)owns and manages energy transportation and storage assets in North America. The company is a member of the dividend achievers index, and has raised distributions for 14 years in a row. The stock yields 6.20% ( analysis)

Universal Health Realty Income Trust (UHT)operates as a real estate investment trust (REIT) in the United States. The company is a member of the dividend achievers index, and has raised distributions for 22 years in a row. The stock yields 6.80% ( analysis)

Philip Morris International Inc. (PM), through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. The company has consistently boosted distributions to stock holders since it was spun out of Altria Group (MO) in 2008. The stock yields 4.50% ( analysis)

Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, wine, and other tobacco products in the United States and internationally. This dividend champion has raised dividends for 43 consecutive years. The stock yields 6.20% (analysis)

Consolidated Edison, Inc. (ED), through its subsidiaries, provides electric, gas, and steam utility services in the United States. This dividend aristocrat has raised distributions for 36 consecutive years. The stock yields 4.90% ( analysis)

Dominion Resources, Inc. (D), together with its subsidiaries, engages in producing and transporting energy in the United States. The stock yields 4.10%

At the end of the day, investors should determine what they are trying to accomplish with their dividend portfolios. The stocks mentioned above are just a piece of the puzzle and not the solution to building a dividend portfolio for the long run.

Full Disclosure: Long WMT, FDO, D, ED, MO, PM, NNN, O, KMP, UHT, RDS.B

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Six Notable Dividend Growth Stocks in the News

Every week, a growing number of companies raise distributions. Up until now I tended to include in my review all companies raising distributions for the given week. In order to be more efficient however, I am going to concentrate in my weekly reviews from now on, only on companies which have raised distributions for over five years in a row. This should eliminate focusing on companies which have not raised distributions for a sufficiently long period of time. If a company keeps growing distributions for at least five years, it would definitely be included and reviewed accordingly. If a company has raised distributions for at least a decade, it would be included in my list for further research and possible accumulation on dips.

The most notable companies which raised distributions last week include:

Enterprise Products Partners L.P. (EPD) provides a range of services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products, and petrochemicals in the continental United States, Canada, and Gulf of Mexico. The company raised its quarterly distributions by 1.30% to 58.25 cents/unit. This master limited partnership is a member of the dividend achievers index and has raised distributions for eleven consecutive years. Yield: 5.60%

Enterprise GP Holdings L.P. (EPE), which is the general partner behind Enterprise Products Partners L.P. (EPD) and Energy Transfer Equity L.P. (ETE), also announced an increase in its quarterly distributions. The company raised distributions by 2.70% to 57.50 cents/unit. This master limited partnership has consistently raised distributions every quarter since 2005. Yield: 3.70%

Reynolds American Inc. (RAI), through its subsidiaries, manufactures and sells cigarette and other tobacco products in the United States. The company’s board of directors approved an 8.9% dividend increase from 45 to 49 cents/share. Reynolds American has consistently raised distributions since 2005. Yield: 3.20%

Healthcare Services Group, Inc. (HCSG), through its subsidiaries, provides housekeeping, laundry, linen, facility maintenance, and food services to nursing homes, retirement complexes, rehabilitation centers, and hospitals in the United States. The company raised its quarterly dividend from 23 cents/share to 23.25 cents/share. It has raised dividends every single quarter since 2003. Yield: 3.80%

Genesis Energy, L.P. (GEL), together with its subsidiaries, operates in the midstream segment of the oil and gas industry in the Gulf Coast area of the United States. The company announced a 3.30% increase in its quarterly distribution to 38.75 cents/unit. This master limited partnership has raised distributions since 2004. Yield: 6.20%

Omega Healthcare Investors, Inc. (OHI) operates as a real estate investment trust (REIT) in the United States. The company raised its quarterly distributions by one penny to 37 cents/share. This REIT has consistently raised dividends since 2004. Yield: 6.40%

Most of the companies listed above seem like they have the business model that would allow them to raise distributions over the next few years. I would place Enterprise Products Partners L.P. (EPD) on my list for further research, given the length of its dividend history and the fact that it is one of premier master limited partnerships in he US.

Full Disclosure: None

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Lowe’s Companies (LOW) Dividend Stock Analysis

Lowe's Companies, Inc., together with its subsidiaries, operates as a home improvement retailer in the United States and Canada. This dividend aristocrat has increased distributions for 48 consecutive years. The company was one of original dividend aristocrats that joined the elite dividend index in 1989.

Over the past decade, this dividend stock has delivered an annual total return of 6.90%.

At the same time earnings per share have increased only by 9.80% per year since 2001. Earnings per share have been weak since hitting $1.99 in 2007 as sales have stagnated and same store sales drifted lower. For 2010 analysts estimate an increase in EPS by 16.20% to $1.41. For FY 2011 analysts expect the company to earn $1.67/share, which would represent an increase of 18.40% in comparison with the results in FY 2010.


The company expects to open 40-45 new stores in FY 2010, which would increase it total sales floor by 2 to 3%, and also help it in increasing market share. Lowe’s has kept expanding even during the housing crisis as it opened 153 stores in 2007, 115 in 2008 and 62 in 2009.
While the housing market still appears to be soft, the bottom has likely been hit. This could depress sales at stores like Lowe’s and Home Depot in the near term. A strong demographic factor is the high level of homeownership in the US at 67%, coupled with aging of homes. In addition to that, people are much more likely to participate in do it yourself home renovation projects during a crisis, in order to try to increase the value of their home, to make it more marketable or just to make it a better place to live.

The home improvement market, which declined by 8.4% in 2009 is expected to increase by 4.70%/annually until 2014.

At its annual meeting Lowe's Companies, Inc. (LOW) Chairman and CEO Robert A. Niblock told shareholders the company is seeing consumers reordering priorities, being more pragmatic across all aspects of their lives and as a result, increasing their involvement in home improvement projects.

As the year progressed, Niblock said the company saw signs consumers were expanding their spending beyond repair and maintenance into more discretionary products and projects.
"Even in these uncertain economic times affinity for the home remains strong. The 'to-do' list is still on the refrigerator and includes most of the same projects as in the past," said Niblock. "We remain confident in spite of the economic environment, and we work to find the right balance between managing expenses and investing in our business to ensure we continue to deliver the excellent service consumers expect from Lowe's." (source: Lowe’s)

The annual dividend per share has increased by 27.70% on average since 2001. A 28% growth in dividends translates into dividends doubling every two and a half years. Since 1980 the company has managed to double its quarterly dividend every five years on average.

The dividend payout ratio has increased dramatically over the past decade, with the largest increases occurring after 2007. Given the estimated increases in earnings per share over the next few years, the company could easily afford to further increase the dividend payout ratio, by distributing a higher dividend from earnings. 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 experienced a dramatic drop since 2007, which was coincidental with the beginning of the housing crisis. As the economy rebounds, and sales and profitability increase, this indicator should return to its normal levels above 15%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Currently the company trades at a P/E of 16.60, yields 2% and has a dividend payout ratio of 31%. In comparison, Home Depot (HD) trades at a P/E of 17.10 and yields 3.20%. While Home Depot (HD) yields more, the company maintained its distributions flat for 3 whole years, while Lowe’s was increasing their distribution. As a result Home Depot (HD) lost its dividend achiever status in 2008. The stock trades at a yield which is lower than my minimum yield of 2.50%. The stock however has yielded above 2.50% only during 2008-2009 during the financial crisis. Nevertheless I would consider initiating a position in the stock on dips below $18.

Full Disclosure: None

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Why dividend investing beats US Treasuries today?

With yields on 10 year and 30 year US Treasuries reaching their lowest levels since 2008, investors are left with one less potential source of income in retirement. Currently, investors who purchase a $1000 bond that matures in 30 years are expected to receive an annual yield of $38. Investors who lock their money in a 10 year Treasury bond will receive $24. The reason for the low yields is low expected inflation for the near future, and the fear of a double dip recession which could even lead to deflation. The risk behind investing in treasuries today is that the low yields would not compensate investors even for a small inflation of 3% per year until maturity. In other words, the purchasing power of the interest income from an investment in fixed income will be much lower five, ten or thirty years from now. So how can investors manage to generate income from their nest eggs, which they have worked so hard and for so long to accumulate?

What investors need, is an instrument, or an asset class, that not only provides decent current yields, but also generates an income stream that meets or exceeds inflation over time. One such class is dividend paying stocks. Stocks in general have been mostly flat over the past decade, with the majority of returns coming from dividends. One of the reasons why stocks didn’t perform so well over the past decade is because they were grossly overvalued in 2000. Investors who want to generate income in retirement however should focus only on a select number of companies which have the following characteristics:

1) A history of consistent dividend increases. I prefer companies which have raised dividends for at least ten consecutive years.

2) An adequately covered dividend from earnings. I search for companies where annual earnings per share are at least twice the amount of annual dividends

3) A low price earnings ratio and at least some earnings growth. Overpaying for stocks could turn costly, and lead to low returns over time. I prefer stocks which have a P/E of less than 20.

4) A current yield of at least 2.50%. While some investors see this yield as “low”, they tend to forget that with regular dividend increases, the yield on cost would increase over time. By stacking companies with varying yield and dividend growth characteristics it is possible to create a portfolio yielding 4% where dividend increases match or exceed the rate of inflation.

There are only 300 or so stocks trading on US exchanges that have a history of growing their distributions for at least ten years. By applying a simple screen where P/E ratio is less than 20, the current yield is 2.50% or more and where the dividend is sustainable, investors could end up with a manageable list of stocks for further research.

A sample of seven dividend growth stocks which met these criteria include:

Chevron Corporation (CVX) operates as an integrated energy company worldwide. The company is a dividend achiever, and has consistently raised its dividends for 23 years in a row. Annual dividend payments have increased by an average of 8.30% annually since 2000. Yield: 3.40% (analysis)

The Clorox Company (CLX) engages in the production, marketing, and sales of consumer products in the United States and internationally. The company operates through four segments: Cleaning, Lifestyle, Household, and International. Clorox has paid uninterrupted dividends on its common stock since it was spun out of Procter and Gamble (PG) in 1968 and increased payments to common shareholders every year for 32 years. The company is a member of the elite S&P Dividend Aristocrats Index.Annual dividends have increased by an average of 13% annually since 1999. Yield: 3.20% (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, operates as a worldwide foodservice retailer. It franchises and operates McDonalds restaurants that offer various food items, soft drinks, coffee, and other beverages. The company is also a dividend aristocrat, which has been consistently increasing its dividends for 33 consecutive years. Annual dividend payments have increased by an average of 28.20% annually since 2000. Yield: 3.20% (Analysis)

Medtronic, Inc. (MDT) develops, manufactures, and sells device-based medical therapies worldwide. The company operates in the following segments:Cardiac Rhythm Disease Management , Spinal, CardioVascular, Neuromodulation, Diabetes, Surgical Technologies and Physio-Control. This dividend champion has raised distributions for 33 years in a row. The annual dividend payment has increased by 17% per year since 2000. Yield: 2.70% (analysis)

PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company operates in four divisions: PepsiCo Americas Foods (PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe, and PepsiCo Asia. The company is a member of the S&P Dividend Aristocrat index, after raising distributions for 38 years in a row. Annual dividend payments have increased by 13.60% on average since 2000. Yield: 2.90% (Analysis)

Sysco Corporation (SYY), through its subsidiaries, markets and distributes a range of food and related products primarily to the foodservice industry in the United States. SYSCO Corporation is a dividend champion as well as a component of the S&P 500 index. It has been increasing its dividends for the past 40 consecutive years. Annual dividend payments have increased by an average of 17% annually over the past 10 years. Yield: 3.50% (Analysis)

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. The company is a dividend achiever, and has been consistently increasing its dividends for 16 consecutive years. Annual dividends have increased by an average of 15.80% annually since 2000. Yield: 2.30% (analysis)

It is important to also hold a diversified portfolio of dividend stocks, in order to avoid concentration to particular segments, which could jeopardize dividend income in retirement. As a result holding at least 30 individual stocks representative of the ten industry groups of the S&P 500 makes sense.

Last but not least, while investing in dividend stocks would likely lead to a higher income stream in ten or thirty years, which would be much better than the fixed income from US Treasuries, dividend investing still has its risks. One of the biggest risks for dividend investors is that companies could cut or eliminate dividend payments. A diversified portfolio of stocks would soften the blow to total dividend income of course. However there have been times like during the Great Depression, when most companies cut dividends substantially. During those times investments in government bonds produced not only decent income, but also decent total returns as well. In addition to that, investors in Japan in the 1990’s were also faced with low yields on the long term government bonds. However this was a much wiser investment than buying Japanese stocks as represented by the Nikkei 225 index.

While dividend stocks would likely do much better than US Treasuries, investors should understand risks of dividend paying stocks before investing. This could provide them with the edge against investors who chase unsustainable yields and overpay for income streams.

Full Disclosure:

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