After a slow but relentless decline over the summer, Lockheed Martin Corporation (NYSE: LMT) looks to have hit bottom, around the critical level of US$340.
While the investors might not start to celebrate yet, the company recently announced several positive catalysts – new contracts, stock buyback, and even a dividend increase.
Lockheed Martin recently secured 2 new contracts worth over US$2b in total. The first concerns 16 F-35 aircraft, while the second concerns Trident II missile production and deployed systems support. Being a large government contractor, the company has been under the risk due to the government shutdown, yet this has been averted since the debt ceiling has been raised.
However, Goldman Sachs (NYSE: GS) recently downgraded the stock from Buy to Neutral, quoting a slowing budget environment that will make it tough to increase sales. The bank still kept the US$402 price target, which is well above the current price (US$351).
Meanwhile, the company announced additional authorization for share repurchase and a dividend hike. With another US$5b, the total repurchase program is now at US$6b. The dividend that yielded US$2.60/share per quarter is now paying US$2.80 – an 8% increase. This gives a forward yield of 3.20% at the moment.
What is Lockheed Martin worth?
Lockheed Martin is still trading at a discount. According to our valuation, the intrinsic value for the stock is $513.23, which is above what the market is valuing the company at the moment. This indicates a potential opportunity to buy low.
What's more interesting is that Lockheed Martin's share price is relatively stable, which could mean two things: firstly, it may take the share price a while to move to its intrinsic value, and secondly, there may be fewer chances to buy low in the future once it reaches that value.
This is because the stock is less volatile than the broader market, given its low beta.
What kind of growth will Lockheed Martin generate?
Investors looking for growth in their portfolio may want to consider a company's prospects before buying its shares. Buying a great company with a robust outlook at a low valuation is always a good investment, so let's also look at the company's future expectations.
Though in the case of Lockheed Martin, it is expected to deliver a relatively unexciting earnings growth of 7.7%, which doesn't help build up its investment thesis. Growth doesn't appear to be the main reason for a buy decision for the company, at least in the near term.
The Dividend Opportunity
There are 3 factors that stand behind a good dividend: affordability, volatility, and growth.
Looking at the last year, Lockheed Martin paid out 57% of its cash flow as a dividend, which is reasonable. This suggests that there is dividend safety as long as the earnings don't drop significantly.
Furthermore, the dividend has been stable over the last 10 years, and if we compare the annual payments, we can see that it grew from US$3.0 in 2011 to US$11.2 in the previous year - or approximately 14% per year. Finally, looking at the earnings per share (EPS) growth, we can see that it grew at 19% annually over the past 5 years.
The combination of these 3 factors gives the company a solid dividend prospect status at the proper valuation.
What this means for you:
Are you a shareholder? Even though growth is relatively muted, since LMT is currently undervalued, it may be a great time to accumulate more of your holdings in the stock. However, other factors such as capital structure to consider could also explain the current undervaluation.
Are you a potential investor? If you've been keeping an eye on LMT for a while, now might be the time to enter the stock. Its future outlook isn't fully reflected in the current share price yet, which means it's not too late to buy LMT. But before you make any investment decisions, consider other factors such as the strength of its balance sheet to make a well-informed buy.
So while earnings quality is essential, it's equally important to consider the risks facing Lockheed Martin at this point. Every company has risks, and we've spotted 1 warning sign for Lockheed Martin you should know about.
If you are no longer interested in Lockheed Martin, you can use our free platform to see our list of over 50 other stocks with high growth potential.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.