Dividend Report Card: Lockheed Martin

In this series, we analyze financial metrics to begin answering the following questions about a company's dividend:

1. Over time, has this company steadily increased its payouts?
2. How sustainable is the dividend?
3. Does the company have room to further increase the dividend?

The Dividend Report Card wasn't designed as a buy or sell signal but rather as a tool to gauge the health of a company's dividend. For a full explanation of each category, click here for a tutorial.

Today's pupil is Lockheed Martin (NYSE: LMT), which posts a 3.7% yield.

Dividend history

Source: Capital IQ, a division of Standard & Poor's.

In September, Lockheed Martin boosted the quarterly dividend by a full 19%, marking eight consecutive years of dividend increases. It's been an impressive streak, for sure. Lockheed did cut the dividend, however, in 2000 to help reduce debt at the time.

Nevertheless, the dividend has since more than recovered from pre-cut levels, so we won't ding it here -- Lockheed scores a 5 of 5 for this category.

Sustainability

Source: Capital IQ, as of Feb. 3.

Lockheed does carry a good helping of debt (just more than $5 billion), but it covers its interest expenses nearly 12 times over with operating profits.

The dividend is also well-covered by earnings and free cash flow, so the current payout looks very sustainable.

Growth

Let's have a quick chat about the sustainable growth rate versus the "feasible" growth rate. 

Recall that sustainable growth rate is equal to return on equity times the earnings retention ratio (1 – payout ratio). Even though Lockheed has a return on equity of 67.5%, most of that is fueled by the company's aforementioned leverage, and it's unlikely that Lockheed can find a lot of projects with 67%-plus returns.

The median analyst estimate for long-term EPS growth, for example, is 7.75%, so where's all the cash going if it's not going to the dividend and it's not retained? 

The answer is that the cash is going to share buybacks, to the tune of $2.4 billion ($6.94 per share) over the past 12 months versus $969 million ($2.80 per share) in dividends. Add dividends and share buybacks together ($9.74 per share) and you'll quickly find that the company's "total" payout ratio is more than 100%. This would imply a negative modified sustainable growth rate.

Lockheed could, however, conceivably slow its repurchase program and still post a 10%-plus modified sustainable growth rate, so we won't penalize it.

Competitors
An "ungraded" section of the dividend report card is to see how a stock's current yield stacks up against that of direct competitors. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or vice versa, to bring it more in line with the industry average.

With its current yield at 3.7%, Lockheed Martin's payout is slightly above the peer average. If the share price doesn't appreciate to bring it more in line with peers, the board may slow the rate of future increases.

Pencils down!
With all the numbers in, here's how Lockheed Martin's dividend scored:

Not bad. Not bad at all. In a perfect world, I'd prefer the dividend per share and the buyback per share figures to be closer, but I'm still intrigued by any stock yielding double the S&P 500 average with an A-rated dividend to boot.

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