I've been wanting to purchase a company in the Aerospace & Defense sector for a while. I looked hard at RTN and almost bought some earlier in the year. Most stocks in general have had a nice run this year and I don't see much of a change in the market with QE3 i.e. QE "infinity" in effect. So I decided to make a quick comparison of 5 companies that compete in the same general defensive areas.
2 of the 5 companies don't meet my minimum criteria of 5 years of consecutive dividend increases. Both COL and BA held the dividend the same for 3 years during the Great Recession. I gave them credit for 1 year of increase even though this year isn't officially over. Those two are immediately eliminated.
GD
|
COL
|
BA
|
RTN
|
LMT
|
|
Yield
|
3.02%
|
2.19%
|
2.4%
|
3.56%
|
4.9%
|
Payout
|
28.3%
|
24.3%
|
29.7%
|
31.9%
|
43.8%
|
TTM P/E
|
9.81
|
13.2
|
12.74
|
9.79
|
10.94
|
Years Inc.
|
21
|
1
|
1
|
8
|
10
|
5-year CAGR
|
15.5%
|
N/A
|
N/A
|
12.1%
|
21.1%
|
10-year YOC
|
12.76%
|
N/A
|
N/A
|
11.16%
|
33.24%
|
The remaining three companies all have yields over 3%, and acceptable payout ratios. I also like to look for companies that have a 10-year YOC over 10%. I actually wrote an article on seeking alpha about this metric that I like to use to evaluate a company here: http://bit.ly/GSsaqt.
The highest 10-year YOC is for LMT but this assumes they can increase their dividends by the same pace for the next 10 years. I don't think this is likely but if they only increase their dividends by half of their 5-year CAGR then they would still be over the 10% 10-year YOC that I want.
Although I think all three of these companies could provide long-term dividend growth and a great investment, I decided to buy LMT mainly because it has the highest yield and highest dividend growth rate currently. These companies do seem fairly valued and have had a nice run this year. Long-term this price won't matter much but if the price drops significantly from here then I will be adding additional shares.
I bought 21 Shares of LMT @ 93.70/share. This purchase will add an additional $96.60 to my yearly dividend income.
There are still risks with defense cuts but there is also a chance that Romney is elected and he says that he plans on adding 2 trillion dollars to the defense budget. This would certainly help these companies.
What are you watching/buying?
Great purchase! LMT has had some very strong dividend growth over the past few years. Gotta love that 5% yield.
ReplyDeleteI'm currently watching ABT and IBM. Two stocks that were near 52 week highs and just suddenly dropped like rocks over the past 2 days. Hoping for the fall to continue just a bit longer.
Thanks FI Fighter. It's hard to find a stock with that kind of yield with a payout ratio under 50%.
DeleteI do like ABT and IBM but IBM's yield is a little low for me. They have had very nice capital appreciation and dividend growth though. I bought some ABT back in February of 2011 at 45.75 and sold in October of last year around 54. I should have held on but I hadn't really started my DGI strategy yet. It is still on my watchlist though. Good luck.
Nice purchase. I haven't really looked at the defense sector yet, although I probably should just to get some diversification to it. I'm a little worried about the potential for cuts come next year. Although if it truly is already accounted for then we could see a pretty big pop if Romney is elected spurring the total return. Of course no matter who wins the defense budget will still be required spending to insure the safety of the nation.
ReplyDeleteThanks PIP. I do share some of your concerns with the cuts and having a lot of their income tied to the government. However, if they didn't reduce the dividend during the Great Recession then I'm confident they can continue to grow it with some minor defense cuts. As you point out, defense spending will never go away. Good luck
DeleteI'll tell you what, I regret not buying LMT! That stock has been dividend growth monster for quite a while. Last year I was agonizing between RTN and LMT and decided on the former. Turns out both performed well.
ReplyDeleteI like that it is still possible to lock in a great yield. Should be a good one, but I just don't see how they can maintain the same DGR for much longer. Like you say if they can maintain even half, it's still awesome!
I just bought APD and am watching SBSI and MCD.
Hi CI,
DeleteThanks for stopping by. I regret not buying either earlier in the year. However, unrealized capital gains will only matter to me if the company's fundamentals change and I need to sell. By locking in a higher initial rate I won't need a super high DGR for nice returns. If it happens, it will just be a bonus.
Nice buy on APD, I don't know a whole lot about them but a company that has increased dividends for the last 30 years is worth some additional research. I do own MCD and will be looking to add more if the price drops much more.