Is Lockheed Martin’s Share Buyback Program a Good Deal? Is Lockheed Martin’s Latest Share Buyback Program a Good Deal for Shareholders? By Sean O’Reilly
Buffett on Buybacks “There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds -- cash plus sensible borrowing capacity -- beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively calculated.” -- Warren Buffett, 1999 Berkshire Hathaway Chairman’s Letter to Shareholders
$3 billion announcement No stranger to consistent share repurchases, Lockheed Martin announced an additional $3 billion in authorized share repurchases on Sept. 24, 2015 This is in addition to spending over $9.5 billion on repurchases over the last 5 years
Historical Results Lockheed generated revenues of $45.6 billion, net income of $3.614 billion, and free cash flow of over $3 billion in FY 2014 The quarter ended June 28, 2015 was decent, with sales coming in at $11.643 billion, up 2.9% over last year Net earnings were up for the quarter 4.5% to $929 million
Historical Results All of Lockheed’s 5 principal business segments – Aeronautics, Information Systems, Missiles and Fire Control, Mission Systems and Training, and Space Systems – are leaders in their fields and generate strong returns Of particular note is its aeronautics business segment which includes the F-35 Lightning II Joint Strike Fighter Net sales for the F-35 program represented approximately 19% of total consolidated net sales for the six months ended June 28, 2015 Lockheed’s F-35 fighter jet remains the stealth fighter of choice for the U.S. Air Force, England, and numerous other countries
Sikorsky Aircraft Acquisition In June, Lockheed agreed to acquire Sikorsky Aircraft, a global military and commercial helicopter manufacture and design, for $9 billion in cash from United Technologies Acquisition will be funded through a combination of available cash and debt This acquisition and continued share buybacks can both be funded thanks to balance sheet strength and significant free cash flow generation
What Would Warren Do? Is Lockheed Martin’s latest share repurchase program a prime example of intelligent capital allocation, or a waste of shareholders’ money?
LMT’s buyback record is good
LMT’s buyback record is good LMT has spent approximately $10 billion over the last 5 years buying back stock, much of it at much lower prices than the stock trades for today – particularly in 2011 and 2012 Argument for further buybacks supported by reasonable P/E ratio and exceptional returns on capital
Best use of shareholders’ capital? LMT currently trades for 17.8x forward EPS according to S&P Capital IQ Earnings per share are expected to grow 9.38% annually through 2019 This compares favorably with the S&P 500 Index’s current P/E ratio of 18.96 Would you want to own LMT at current valuation or the S&P 500?
Foolish Bottom Line LMT trades at a modest discount to the rest of the market Boasts strong competitive position in all its business segments Generates significant free cash flow every year after capital expenditures and R&D Latest buyback program isn’t as good a deal as in recent years, but seems reasonable in light of taxation of any dividends paid out