Lockheed Martin: Unlike Boeing, Their Dividend Can Outlast A Downturn

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Introduction

There have been very few pockets of strength for dividend investors during this severe economic crisis, such as the global defense giant Lockheed Martin (LMT). It would be safe to say that few investors are questioning their ability to sustain their dividend at the moment; however, the same could have also been said for Boeing (BA) not all that long ago. Whilst I am certainly not suggesting the same fate awaits Lockheed Martin, it nonetheless is still worthwhile to stress test their dividend sustainability since a Presidential election is only months away and a key export market, Saudi Arabia, is under immense budgetary pressure.

Dividend Coverage

When assessing dividend coverage, I prefer to forgo using earnings per share and use free cash flow instead, since dividends are paid from cash and not from “earnings”. The graph included below summarizes their cash flows from the last quarter and previous three years.

Lockheed Martin cash flows

Image Source: Author.

It should come as little surprise nor need much explanation that their historical dividend coverage has been excellent, with an average across 2017-2019 of 184.07%. Whilst it temporarily dropped below 100% during 2018, this was simply due to them making large additional discretionary pension contributions to the tune of $3.574b. Once removing these, their average dividend coverage for the same period of time increases to a very solid 234.83%.

Unless something significant and largely unexpected changes, there are zero reasons to believe that they cannot continue covering their dividend in the future. To stress-test their dividend sustainability, two scenarios were envisioned whereby their operating cash flow decreases by 25% and 33% whilst capital expenditure remains unchanged, which utilized the average of 2017-2019 without the discretionary pension as a base.

If either of these two scenarios came to fruition, it would see their operating cash flow decreased to only $5.125b and $4.578b, respectively, which as the graph above indicates is well beneath their results for 2019 of $7.311b. This would then see their free cash flow decrease to only $3.812b and $3.265b, respectively, which, based on my calculations, would still be sufficient to provide dividend coverage of 141.59% and 121.28%, respectively. Naturally, this would still be adequate to cover their dividend payments without the use of debt; however, it would mean the end of their generous share buybacks and significantly reduce any future growth.

Financial Position

Since they could still theoretically cover their dividend payments in both of these scenarios, the impact on their financial position will ultimately determine whether they are still sustainable during these theoretical downturns. The three graphs included below summarize their financial position from the last quarter and previous three years.

Lockheed Martin cash & debtLockheed Martin solvency ratios

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After reviewing these financial metrics, it easily can be seen that their current leverage is low and safe, as primarily evidenced by their net debt-to-EBITDA of 1.12 and interest coverage of 14.13. It is nonetheless still important to analyze the impact if either of the aforementioned two scenarios eventuated.

It would be reasonable to assume that any decreases in operating cash flow were met with an equivalent decrease in EBITDA. After once again utilizing the average of 2017-2019 and net debt from the first quarter of 2020 as the bases, the two scenarios would see their net debt-to-EBITDA increase to only 1.67 and 1.87, respectively. These are both still reasonably low and safe, especially for a company during what would be a moderately severe downturn, which indicates that they would not be required to reduce their dividend in order to deleverage.

Lockheed Martin liquidity ratios

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Thankfully, their current liquidity is strong, as evidenced with a current ratio of 1.23 and a modest cash balance relative to their current liabilities and operating cash flow. Since they would still be producing free cash flow in the aforementioned two scenarios, there are no material reasons to be concerned about their liquidity. Since they are a very large company that is critical for national security, it would be very unlikely that they cannot access the necessary financing to meet any upcoming liabilities.

Conclusion

Whilst it is still too early to know whether a potential new Presidential administration will see defense spending reduced, the risk exists nonetheless as the fiscal impacts from this coronavirus economic crisis will continue being wide-ranging. Thankfully, it appears that even in a moderately severe scenario, they will still be able to sustain their all-important dividend; however, it would obviously not stop their share price from decreasing. Since nothing material has eventuated since publishing my previous article, I believe that maintaining my neutral rating is appropriate.

Notes: Unless specified otherwise, all figures in this article were taken from Lockheed Martin’s Q1 2020 10-Q, 2019 10-K and 2017 10-K SEC Filings, all calculated figures were performed by the author.

Disclosure: I am/we are long LMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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