Valuation in the Aerospace and Defense Sector

The Aerospace & Defense sector makes for some great investments. The stocks discussed here are United Technologies Corp (UTX), The Boeing Company (BA), Lockheed Martin Corp (LMT), General Dynamics Corp (GD), Raytheon Company (RTN), Northrop Grumman Corp (NOC) and L-3 Communications Holdings Inc (LLL). All the stocks except BA are Dividend Contenders in David Fish’s CCC list; companies that have raised dividends consecutively for 10-24 years. BA saw a freeze in dividend raises from 2009 to 2011.
Each company discussed here has its own specialty and is the leader in manufacturing defense related products and services. I have not read enough about the sector to comment or recommend one stock or another based on the technology and business-outlook side of things. For now, I will simply be looking at the valuations and the financials/dividend history to compare the stocks. I recommended readers to do their own research before investing in any of the stocks discussed.The US spends a massive 3.8% of its GDP (numbers as of 2013) on military and defense budget. That amounts to about $640B – a number much larger than any other country on this planet. To put things into perspective, the military/defense budget of the next 10 highest spending countries need to be put together to get close to that number. Suffice it to say, that the defense contractors discussed here make for some juicy returns for your investment money.

Valuations

The current valuations of the stocks under questions are shown below.

United Technologies Corp (UTX)
United Technologies Corporation provides technology products and services to the building systems and aerospace industries worldwide. UTX is a conglomerate operating in six segments – Otis, UTC fire & security, Pratt & Whitney, Hamilton Sundstrand and Sikorsky. UTX has been raising dividends for 20 years in a row with 5-yr and 10-yr dividend growth rates (DGR) of 10.3% and 14.5% respectively.
UTX is probably the most diverse of the group, as the company is a conglomerate with defense being only one component of a massive corporation (defense revenue accounts for 21% of the company’s total revenue). UTX is also a DJIA component and the P/E valuation closely matches that of the index.
The Boeing Company (BA)
The Boeing Company, together with its subsidiaries, designs, develops, manufactures, sells, services, and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services worldwide. The company operates in five segments: Commercial Airplanes, Boeing Military Aircraft, Network & Space Systems, Global Services & Support, and Boeing Capital. BA, after a freeze in dividend raises from 2009-2011, has started aggressively raising dividends since. Last year’s dividend raise was a whopping 50% and the 5-yr DGR currently stands at 8.18%.
Probably the most publicly known companies because of their commercial airline manufacturing business, BA is also a DJIA component and like UTX, has a fairly similar matching to the index – although the current P/E and P/B ratios are very high. With a Graham number of 50.97, BA is currently overvalued.

Lockheed Martin Corp (LMT)
Lockheed Martin Corporation, a security and aerospace company, is engaged in the research, design, development, manufacture, integration, and sustainment of advanced technology systems, products, and services for defense, civil, and commercial applications in United States and internationally. LMT is a dividend contender having raised dividends for 11 years in a row, with a 5-yr DGR of 21.2% and a 10-yr DGR of 23.5%.
Lockheed Martin is the highest grosser in the defense sector for the past few years and also counts defense spending as the biggest source of revenue at 95%. LMT is at the top-end of the scale with highest yield, highest payout ratio, highest 5-yr DGR. However, LMT also has the highest amount of debt totaling $6.15B (which is a debt/equity of 1.28). The company will probably not be able to keep up with the massive dividend increases going forward. With a Graham number of 57.28, LMT is currently overvalued.

General Dynamics Corp (GD)
General Dynamics Corporation operates as aerospace and defense company worldwide. Its Aerospace group designs, manufactures, and outfits business-jet aircrafts; provides aircraft services, such as maintenance, repair work, fixed-based operations, and aircraft management services; and performs aircraft completions for aircraft.  GD is a dividend contender having raised dividends for 23 years in a row, with a 5-yr DGR of 10.3% & 10-yr DGR of 13.3%.
GD is right in the middle of the pack for all valuations, but has stood the test of time – with the 23 years of dividend increases and will cross into the dividend champions list in two years, provided they keep the dividend raises coming.

Aerospace & Defense sector ranking based on revenue

Raytheon Company (RTN)
Raytheon Company develops integrated products, services, and solutions in the areas of sensing; effects; command, control, communications, and intelligence; mission support; and cyber and information security worldwide. It operates in four segments: Integrated Defense Systems; Intelligence, Information, and Services; Missile Systems; and Space and Airborne Systems. RTN is a dividend contender having raised dividends consecutively for 10 years; with a 5-yr DGR of 14.4% and 10-yr DGR of 10.4%.
Raytheon’s P/E, P/B, debt level, yield, payout ratio and DGR all are very agreeable and will need a closer look for an investment at current levels.

Northrop Grumman Corp (NOC)
Northrop Grumman Corporation provides systems, products, and solutions in aerospace, electronics, information systems, and technical service areas to government and commercial customers worldwide. The company’s Aerospace Systems segment designs, develops, integrates, and produces manned aircraft, unmanned systems, spacecraft, high-energy laser systems, microelectronics, and other systems and subsystems. NOC is a dividend contender having raised dividends consecutively for 11 years; with a 5-yr DGR of 10.9% and a 10-yr DGR of 12.7%.
Northrop Grumman also seems very attractively valued at current market levels. The company has very agreeable metrics such as P/E, P/B, debt level, yield, payout ratio and DGR.
L-3 Communications Holdings Inc (LLL)
L-3 Communications Holdings, Inc., through its subsidiary, L-3 Communications Corporation, provides command, control, communications, intelligence, surveillance, and reconnaissance (C3ISR) systems; aircraft modernization and maintenance; and national security solutions in the United States and internationally. The company operates in four segments: Aerospace Systems, Electronic Systems, Communication Systems, and National Security Solutions. NOC is a dividend contender having raised dividends consecutively for 11 years; with a 5-yr DGR of 13.8%.
The lowest yielder, but also the lowest payout ratio (at 28.4%) of the group provides for plenty of room for future increases. The company is also just a little higher than the Graham number (115.89) and is currently attractively priced.
For the risk averse investor, you can get exposure to all the stocks mentioned above by buying one of the following ETFs.

  • iShares US Aerospace & Defense ETF (ITA) – MER 0.44%, yield 1.52%
  • PowerShares Aerospace & Defense Portfolio (PPA) – MER 0.66%, yield 0.98%
  • SPDR S&P Aerospace & Defense ETF (XAR) – MER 0.35%,  yield 2.52%
What are your thoughts on the stocks mentioned? Do you own any? What are your thoughts/comments/concerns on them? Leave a comment below.
Full Disclosure: None. My full list of holdings are available here. 

The Energy Sector

Energy companies in oil and natural gas sub-sectors provide investors with a great stream of passive income with healthy dividend payout and a fairly decent dividend growth rate. The energy sector is one of the top grossers of revenue across the world. In addition, the energy stocks are currently under-to-fairly valued, which makes them more attractive for value investors in current market conditions to initiate or extend their positions.
Warren Buffet, CEO of Berkshire Hathaway, has recently made big moves in the energy sector – with Suncor Energy (SU) and Exxon Mobil (XOM). Berkshire Hathaway took a $524M position in Suncor Energy (source) and a $3.7B position in Exxon Mobil (source).

My Portfolio

I recently closed my position in Husky Energy (HSE), which had not grown its dividends for years and I decided to write a covered call, which ended up in-the-money and being assigned. Read details about that transaction here. Due to this transaction, my asset allocation in the energy sector has dropped below what I consider ideal and I am now considering investing more in the energy sector by either adding more equity in my positions in Chevron (CVX) and Inter Pipeline Ltd (IPL) or invest in new equities.Stocks I am considering are:

Company Name Ticker Quote P/E Yield Payout
Ratio
5-yr
DGR
Chevron CVX $124.03 10.15 3.23% 32.7% 9.13%
ConocoPhillips COP $74.02 11.01 3.73% 41.1% 8.45%
Royal Dutch Shell RDS.B $71.40 9.45 5.04% 47.6% 3.29%
Suncor Energy SU $37.96 19.70 2.11% 41.4% 24.16%
Exxon Mobil XOM $95.01 12.42 2.65% 32.9% 10.04%
I am also considering pipelines/MLPs such as:
Company Name Ticker Quote P/E Yield Payout
Ratio
5-yr
DGR
Enbridge ENB $44.35 39.93 2.84% 168% 13.82%
Inter Pipeline Ltd IPL $25.80 5.00% 5.45%
Oneok Partners LP OKS $53.52 22.91 5.42% 122% 6.42%
Pembina Pipeline PPL $34.40 34.32 4.88% 173%
Kinder Morgan Inc KMI $35.52 36.14 4.62% 87%
TransCanada Corp TRP $47.12 20.85 3.90% 94% 5.09%
My portfolio weighting in IPL is quite high, so I do not intend to add more to IPL. I am debating between picking up more CVX shares or investing in a new equity. What are your thoughts on the equities mentioned here?Edit: I realized that I had excluded the oil refiners from my list of considerations, so adding them to the list here.

Company Name Ticker Quote P/E Yield Payout
Ratio
5-yr
DGR
Hess Corp HES $83.33 2.42 1.20% 1.6% 6.58%
Marathon Petroleum MPC $80.25 11.82 2.09% 21.5%
Phillips 66 PSX $68.48 11.93 2.28% 20.5%
Tesoro Corp TSO $57.42 18.76 1.74% 24.4% 14.87%
Valero Energy Corp VLO $44.11 10.05 2.04% 18.1% 8.32%
Disclosure: I own CVX and IPL.Image Credit: freedigitalphotos.net/Victor Habbick

Dividend Comparison – Tobacco

Tobacco companies manufacture, market and sell cigarettes and other tobacco products. The tobacco giants have been cash cows for many investors as they pay hefty dividends and raise the dividends year after year. The tobacco customers, once hooked, are customers for life except for a small percentage of quitters.
tobacco
The major players in the tobacco industry are listed below.

Company Name Ticker Quote Mkt Cap P/E Yield 5-yr DGR
Altria MO $35.55 $71B 16.23 5.40% 14.30%
British American
Tobacco
BTI $107.57 $102B 16.48 3.95% 10.01%
Lorillard LO $45.11 $16B 14.03 4.88% N/A
Philip Morris PM $90.47 $146B 17.55 4.16% N/A
Reynolds American Inc RAI $49.96 $27B 18.15 5.04% 7.80%
Some tobacco companies listed above have massive amounts of debt. The debt/equity ratio for Altria (MO) is 4.17. Lorillard (LO) and Philip Morris (PM) have negative equity and as a result the debt/equity number remains meaningless. The book value/share for LO is -4.95 and PM is -3.37. The amount of debt and negative equity of these companies keeps me away, even though the the stockholders have been rewarded with a YTD performance of 17.56% (MO), 19.12% (LO), 10.25% (PM).
The other two listed tobacco giants have better and manageable debt – BTI with a debt/equity of 1.79 and RAI with a debt/equity of 1.10.

My Thoughts

The tobacco industry faces more challenges around the world – facing an increased resistance in marketing and sales of the product, litigation and acknowledgement from the public about the health risks associated. The western world taxes cigarettes highly (with the exception of US – although some states in the US tax cigarettes more than others) in order to get people to quit as it puts immense load on the public health system.
Some companies have had decent success by getting into the e-cigarette business and others such as Altira have diversified by producing and selling alcohol products. All things considered, I have decided to stay away from the tobacco companies for now and look for a better valuation in the future to invest in them.
Disclosure: None
Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.

Dividend Comparison – Railroads

The railroads industry is considered a harbinger of the economic boom or bust. Economists always keep a close eye on the railroads industry to give an indication of how the overall economy is doing and where it is going next. And rightly so, most of our goods are transported by the railroads.

 

Some negatives about the industry: While railroads can be a great measure of the economy, there are also a lot of hurdles to the industry.
  • Railroads face constant government regulations.
  • Railroads are heavily unionized and face a large portion of the workforce retiring in the next decade which adds more stress to the financials such as pensions and healthcare obligations etc.
  • Railroads face constant threat from industries such as shipping, trucking businesses, pipelines etc.
  • Railroads face accidents sometimes resulting in a community backlash – pushing people and government more towards using pipelines for oil transportation.
  • Nearly 50% of the North American railroad transport carries coal – a commodity under constant pressure from the environmentally conscious community.
That being said, the railroads may still provide an interesting exposure for a diversified portfolio. The companies covered here have a market cap of $2B+ and positive yield.
Company Name Ticker Quote P/E Yield Payout
Ratio
5-yr
DGR
Operating
Margin
Canadian National CNI $100.44 17.44 1.65% 28.3% 12.92% 36.7%
Canadian Pacific CP $125.32 31.89 1.06% 34.5% 8.08% 26.9%
CSX Inc CSX $26.05 14.16 2.30% 31% 22.10% 29.6%
Guangshen Railway GSH $23.17 15.66 2.46% 29.9% -0.73% 12.3%
Kansis City Southern KSU $110.06 40.32 0.78% 13.8% 28.7%
Norfolk Southern Inc NSC $75.50 13.93 2.65% 36.6% 11.73% 27.20%
Trinity Industries Inc TRN $40.31 11.86 1.29% 8.8% 9.67% 14.9%
Union Pacific Corp UNP $163.37 18.59 1.69% 30.2% 26.17% 32.90%
Westinghouse Air Brake WAB $59.15 21.13 0.27% 3.5% 37.97% 16.90%

My Thoughts

I am still not convinced that railroads are a great investment. While the railroad corporations are aggressive dividend growers, the industry is under pressure from the public. When considering transportation of commodities such as oil, I think pipelines are a better option and where we will constantly turn towards in the future. A recent derailment and explosion in Lac Megantic, Quebec has again put the railroads under the pressure calling for better safety measures and move towards a pipeline model for transporting oil.
Since 50% of the transport by rail in North America is coal, again we face a lot of pressure from the public. With increased power generation coming from renewable energy sources (solar, wind) or with other cheap alternatives (natural gas), the industry faces more hurdles.

Disclosure: None

Photo Credit: John H Kibbler/freedigitalphotos.net

Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.

Dividend Comparison – Media

Media companies have an immense power to reach large populations and influencing them. There are many different kinds of way people consume and entertain themselves – from radio to television to movies, music, vacation resorts etc. The surprising part of this whole mass media empire is that it is only a handful (6-8) of companies who control over 90% of the market share. These companies are truly conglomerates in their own sense.Earlier this year, Comcast bought full stake of NBC Universal from GE earlier this year for $16.7B and I have been thinking of looking into the various entertainment and media companies as a potential investment. Following are the media giants and their dividend comparison.

The Media Giants

Company Name
Ticker
Market
Cap
Quote
P/E
Yield
Payout
Ratio
5-yr
DGR
Comcast/NBC CMCSA $117B $44.68 18.83 1.75% 27% 41.74%
21st Century Fox
News Corp
FOX
NWSA
$70B
$8.6B
$30.92
$14.93
11.92
5.18
0.56%
1.14%
7%
NA
9.1%
NA
Walt Disney DIS $120B $66.98 20.35 1.12% 23% 16.4%
Viacom
CBS Corp
VIA
CBS
$35B
$32B
$72.41
$52.89
17.58
19.86
1.66%
0.91%
27%
18%
NA
-13.99%
Time Warner TWX $57.5B $61.70 19.02 1.86% 33% 7.86%
Sony SNE $22.4B $22.19 95.26 1.25% 64% 3.66%

Subsidiaries

A table of subsidiaries below shows the extent of each company’s empire. Each company has a major stake in various fields of the industry.
Comcast/
NBC
Fox/
News Corp
Walt Disney
Viacom/
CBS
Time Warner
Sony
Broadcast TV NBC Fox ABC CBS,
The CW (50%)
The CW
(50%)
Cable
USA Network,
SyFy, Bravo, E!
FX, National
Geographic
ABC Family,
A&E (50%),
Disney Chnl
MTV,
Nickelodeon,
Comedy Central,
Showtime
TNT, TBS,
HBO
Movie Universal Studios 20th Century
Fox
Walt Disney
Pictures
Paramount Pictures,
CBS Films
Warner Bros Columbia Pictures
Theme park/
Resorts
Universal Parks
& Resorts
Walt Disney
Parks & Resorts
Nickelodeon
Resort Orlando
Parque Warner
Madrid (5%)
Publishing Wall St Journal,
The Times
Marvel, Disney
Publishing
Simon & Shuster DC Comics,
Time, People,
Sports Illus
News MSNBC Fox News ABC News Now CNN, HLN
Business CNBC Fox Business
Sports NBC Sports Fox Sports ESPN CBS Sports NBA TV
Recod label Fox Music Disney Music CBS Records Warner Music Sony Music
Internet iVillage, Fandango,
Hulu (32%)
News Corp. Digital
Media, Hulu (36%)
Disney Interactive,
Hulu (32%)
MTV News Media,
CBS Interactive
Flixter (32%) Sony Online
Entertainment

Disney and Comcast (esp after NBC Universal acquisition) are the largest conglomerates of the mass media industry with market caps of $120B and $117B respectively. The two companies also look very well diversified across the businesses. They have attractive 5-yr dividend growth rates, but the yields are quite low (<2%). The yields are not attractive enough for me to initiate a position, but I will continue to keep an eye on these two.

Disclosure: None.

Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.