Industrial Sector: Finding Companies with Sustainable Dividends

featured selection in my conservative group in order to respond to a series of comments that were posted on a F.A.S.T. Graphs™ article found here.  These articles were prompted in response to a statement that Morningstar made on Lockheed Martin Corp. as follows:

“Morningstar has a comment about the budgetary pressures that “require the U.S. Department of Defense to reduce spending by nearly $1 trillion over nine years, including $487 billion from the Budget Control Act of 2011 and $500 billion from sequestration that began March 1, 2013. Lockheed would be hard-pressed to escape these large reduction requirements. In an attempt to maintain operating margins, the firm proactively reduced head count to 120,000 in 2012 from 146,000 in 2008.”

Therefore, and for starters, I offer the following FUN graph showing that Lockheed Martin’s unfortunate reduction in headcount seems to be having the desired effect on the company’s gross profit margin (gpm) and net profit margin (npm).  Consequently, early indications are that the company may be able to maintain profitability in spite of challenges within the defense industry.  However, as I will cover in a moment, maintaining historical growth rates are a different matter altogether.

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RGA Investment AdvisorRGA Investment Advisor commentary for the second quarter ended July 2020, titled, "The Tale of Two Markets." Q2 2020 hedge fund letters, conferences and more In our Q1 2019 commentary we expressed how “COVID-19 will kick off one of the most profound reshaping of our world any of us will see in our lifetime,” accompanied Read More


The following earnings and price correlated graph on Lockheed Martin Corp. shows that earnings growth has flattened considerably since the recession of 2008.  From the long-term perspective presented below, it is clear that Mr. Market has also been discounting the company’s valuation in conjunction with the lower earnings growth rate (the black monthly closing price line is significantly below the orange earnings justified valuation line).

By focusing on Lockheed Martin Corp.’s more recent history, we discover that their earnings growth rate has been almost cut in half relative to their long-term earnings growth rate.  Furthermore, this has created an adjustment in their normal P/E ratio (the dark blue line) to a normal PE of 10 in contrast to a longer-term normal PE of approximately 15.  Consequently, I believe that the market has currently reset Lockheed Martin’s valuation.  Stated more simply, I believe the concerns that Morningstar raised are currently factored into the company’s low valuation.

On the other hand, from a performance point of view, capital appreciation has certainly been affected by the current discounting of Lockheed Martin’s share valuation.  On the other hand, shareholders can take solace in the fact that the dividend and the dividend growth rate have remained quite solid.

Balance Sheet

The following FUN (fundamentals underlying numbers) graphic looks at Lockheed Martin’s balance sheet on a per share basis.  The following table lists the metrics and the acronym for each item.

Per Share Graph/Balance Sheet

  • assets per share (atps)
  • cash and equivalents per share (cashps)
  • common equity or book value per share (ceqps)
  • debt long-term per share (dltps)
  • debt per share (dtps)
  • invested capital per share (icaptps)

Therefore, at a glance we see that the company’s balance sheet, with the exception of assets per share (atps), has weakened during the last couple of years.  This could be both a red flag, and an indication that the market’s current discounting policy on Lockheed Martin may be appropriate.

 

Statement of Cash Flows

Furthermore, a graphical look at the company’s record of cash flows raises some additional red flags. The following table lists the metrics and the acronym for each item, and the following FUN graphic plots several key items from the company’s statement of cash flows as follows:

Cash Flow Statement

  • capital expenditures per share (capxps)
  • cash flow per share (cflps)
  • dividends per share (dvpsp)
  • free cash flow per share (fcflps)
  • operating cash flow per share (ocflps)

The concerns here are the deterioration in cash flow per share (cflps) and perhaps more importantly to dividend investors, the deterioration in free cash flow per share (fcflps).  However, I remind the reader that this depiction of free cash flow per share is after dividends have been paid.

United Technologies Corporation (NYSE:UTX)

My final featured selection in the Industrial sector is United Technologies Corp., which is also my favorite, and one that I am long in.  However, I should point out that United Technologies is currently technically fully priced, but not overvalued.  On the other hand, I believe that patient investors might wait for a better valuation before purchasing shares.  But, I would simultaneously caution that I believe this is a terrific company that I wouldn’t wait too long for.  The following earnings and price correlated graph and associated performance table speak for themselves.

United Technologies-The Future

In addition to having a great track record, United Technologies is also expected to grow earnings at an accelerated pace going forward.  Although this company is technically categorized in the subsector Aerospace and Defense, I believe this understates the earnings power that this diversified conglomerate possesses.  The following outline taken directly from the company’s website illustrates the diversity of their product lines:

“United Technologies (UTC) is a diversified company that provides a broad range of high-technology products and services to the global aerospace and building systems industries. Our commercial businesses are Otis elevators and escalators and UTC Climate, Controls & Security, a leading provider of heating, ventilation, air conditioning, fire and security systems, building automation and controls. Our aerospace businesses are Sikorsky aircraft and the new UTC Propulsion & Aerospace Systems, which includes Pratt & Whitney aircraft engines and UTC Aerospace Systems aerospace products. The company also operates a central research organization that pursues technologies for improving the performance, energy efficiency and cost of UTC products and processes.”

Therefore, I believe the diversity of this company’s product lines is what has prompted the consensus estimates of 11 analysts reporting to Standard & Poor’s Capital IQ to forecast future earnings growth at 12.9%.  Furthermore, a cross check from Zacks corroborates these estimates with their five-year expected growth rate of 12.6%.  In other words, I consider this a consensus of consensus.

The following FUN graph on United Technologies’ common shares outstanding (csho) supports the above thesis for growth.  I believe this also represents additional evidence of the shareholder-friendly nature of this blue-chip industrial company.

Balance Sheet

The following graphical look at United Technologies’ balance sheet illustrates that the company’s balance sheet is strengthening significantly.  The recent acceleration of most of United Technologies’ per-share balance sheet metrics supports the consensus estimates for re-accelerating growth reported above.

The following FUN (fundamentals underlying numbers) graphic looks at United Technologies’ balance sheet on a per share basis.  The following table lists the metrics and the acronym for each item.

Per Share Graph/Balance Sheet

  • assets per share (atps)
  • cash and equivalents per share (cashps)
  • common equity or book value per share (ceqps)
  • debt long-term per share (dltps)