Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as Corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.
Let's examine how Lockheed Martin (NYS: LMT) stacks up. In this series, we consider four critical factors investors should examine in every dividend stock. We'll then tie it all together to look at whether Lockheed Martin is a dividend dynamo or a disaster in the making.
First and foremost, dividend investors like a large forward yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.
Lockheed Martin yields 4.5%, considerably higher than the S&P 500's 2%.
2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford, even when its dividend yield doesn't seem particularly high.
Lockheed Martin has a moderate payout ratio of 41%.
3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than 5 is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.
Lockheed Martin has a substantial debt-to-equity ratio of 645%, though its interest coverage is a sizable 11 times.
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
Over the past five years, Lockheed Martin's earnings per share have only grown at an average annual rate of 6%, while its dividend has grown at a 21% rate. However, it's unclear whether the company will be able to maintain that much earnings growth in the future given proposed Defense spending cuts and Lockheed's comparatively small backlog (about one-fourth the size of Boeing's).
The Foolish bottom line
So, is Lockheed Martin a dividend dynamo? Perhaps. It has a large yield, a moderate payout ratio, a manageable debt burden, and some historical growth to boot. However, we have yet to find out just how much the company will be hit by the proposed spending cuts. Dividend investors will want to keep an eye out for clues as to how future earnings growth will shape up, such as backlog and defense spending proposals, as they emerge. If you're looking for some great dividend stocks, I suggest you check out "Secure Your Future With 11 Rock-Solid Dividend Stocks," a special report from The Motley Fool about some serious dividend dynamos. I invite you to grab a free copy to discover everything you need to know about these 11 generous dividend payers.
At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any company mentioned.The Motley Fool owns shares of Lockheed Martin. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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