Boasting over two decades of consecutive annual dividend increases, Lockheed Martin (NYSE:LMT) is a Dividend Aristocrat in the making. Shares of the aerospace and defense giant known for its F-35 fighter jet, the C-130 Hercules transport aircraft, the HIMARS, and other state-of-the-art weapons systems are likely to benefit notably upon an inclusion in the prestigious Dividend Aristocrats Index. I believe this is going to be a positive catalyst for the stock’s investment case, adding to my bullish view of the stock.
What’s a Dividend Aristocrat, And When Can LMT Become One?
A Dividend Aristocrat is a term used to refer to a select group of S&P 500 companies that have hiked their dividends consistently year after year for at least 25 consecutive years. Besides this condition, the three other formal requirements for a company to be included in the S&P 500 Dividend Aristocrats Index are the following:
- Being a member of the S&P 500 Index
- Maintaining a float-adjusted market cap of at least $3 billion
- Maintaining $5 million in daily share trading value for three months before acceptance.
Lockheed Martin easily meets these three criteria. Thus, with a track record of 21 consecutive years of dividend increases already in place, assuming the company maintains its current trajectory, Lockheed Martin is poised to fulfill the final condition for inclusion in the esteemed Dividend Aristocrats Index in approximately the next four years.
Why Is Becoming a Dividend Aristocrat Important for LMT Stock?
Becoming a Dividend Aristocrat isn’t just about status. A company’s inclusion in the S&P 500 Dividend Aristocrats Index comes with several benefits, so it’s a relatively big deal.
For starters, yes, status is one of the benefits that will benefit Lockheed Martin stock upon future inclusion in the Index. Currently, only 68 companies boast the Dividend Aristocrat title. Precisely because this group of companies is so elite, its constituents tend to hold a strong standing within the investment community.
Investors appreciate the proven ability of the management teams in these companies to reward them with growing dividends over prolonged periods, including during recessions and challenging market climates. In turn, this leads to Dividend Aristocrat stocks featuring below-average volatility. Evidently, the Dividend Aristocrats Index ETF (BATS:NOBL) currently features a beta of 0.75, lower than the core S&P 500 ETFs’ beta, which is, by definition, 1.00.
Another benefit of being a Dividend Aristocrat is that a stock’s valuation can achieve above-average levels as investors are willing to pay a premium for high-quality names. Thus, while future investors may have to slightly overpay for Lockheed Martin, assuming this premise takes place, investors securing exposure to the stock in advance could end up benefiting from additional gains just from this factor alone.
Finally, I believe that Lockheed Martin could enjoy lower borrowing costs upon inclusion in the index due to its debtors will be reminded of the company’s credibility and overall ability to produce growing profits. Given that Lockheed utilizes debt rather heavily due to the CapEx-heavy nature of its business, evidenced by its current net debt position of $17.2 billion, a reduction in borrowing costs could have a significant effect on improving its profitability.
Dividend Growth Has Decelerated, But Its Future Growth Prospects Remain Strong
One potential concern that investors might have regarding Lockheed’s journey to becoming a Dividend Aristocrat could be the fact that its dividend growth has decelerated in recent years. Particularly, the rate of Lockheed’s past five dividend increases is as follows:
- 2019 dividend increase: 9.1%
- 2020 dividend increase: 8.3%
- 2021 dividend increase: 7.7%
- 2022 dividend increase: 7.1%
- 2023 dividend increase: 5.0%
Despite the declining pace of dividend growth, I don’t think that this should be a concern for investors. I believe that this is a temporary trend formed by management essentially preparing for the possibility of a rising rate environment in advance, which ultimately ensued. Thus, I see the dividend growth deceleration as a prudent move and not a lack of earnings capacity to pursue stronger increases. After all, Lockheed’s EPS has grown by a much stronger five-year CAGR of 9.4% over the same period.
In fact, EPS reached a new record in FY2023, growing by 27.2% to $27.65. This figure implies a healthy payout ratio of 46% against the $12.60 in dividends paid during this period. Therefore, the company has plenty of room to keep growing its dividends and even re-accelerate the pace of dividend increases. In the meantime, the stock’s 2.9% yield is sizable enough to result in meaningful payouts.
Is LMT Stock a Buy, According to Analysts?
Looking at Wall Street’s view on the stock, Lockheed Martin bears a Hold consensus rating based on three Buys, 11 Holds, and one Sell rating assigned in the past three months. At $477.57, the average Lockheed Martin price target suggests 10.2% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell LMT stock, the most accurate analyst covering the stock (on a one-year timeframe) is Charles Minervino of Susquehanna, with an average return of 10.12% per rating and a 69% success rate. Click on the image below to learn more.
Wrapping Up
In wrapping up, I think it’s clear that Lockheed Martin is on track to join the prestigious club of Dividend Aristocrats. The company’s extended track record of consistent dividend increases means that it shouldn’t be more than four years before this event takes place. For investors, this potential inclusion in the S&P 500 Dividend Aristocrats Index means that the stock’s investment case might inherently improve further, thus providing an incentive to hop on board sooner rather than later.
