Lockheed Martin
Lockheed Martin Corporation (NYSE:LMT), an aerospace company and the largest U.S. government contractor, has seen robust dividend growth over the past five years, averaging 22.6% annually. Even with such a plentiful dividend growth that took the yield to the current 4.4%, the payout ratio has remained relatively low at 51% of the current-year EPS estimate. The stock was under pressure recently amidst the fears of the sequestration; however, so far, minimal sequestration actions have taken place that could dent the company’s long-term financial performance. Still, the company sees a potential adverse sequestration effect on sales, based on its model projections, at about $825 million in 2013.
As most of the sequestration effects has already been priced into defense stocks, Lockheed Martin Corporation (NYSE:LMT)’s current valuation—below 12x forward earnings and trading at a discount to the company’s 10-year historical average—makes Lockheed Martin Corporation (NYSE:LMT) an attractive value and income play given its above-average dividend yield and robust dividend growth. Major advantages of this defense company include its wide moat in a sustainable industry and a capacity to weather adverse impacts, such as defense budget cuts, maintaining profitability and paying dividends over long periods of time. In fact, Lockheed Martin Corporation (NYSE:LMT) has raised dividends for a full decade.
Following its record EPS last year in a challenging environment, and a strong start to this year, in which first-quarter margins improved and EPS increased 15% from the prior-year quarter, the company has reiterated its full-year 2013 EPS projection (implying a 7% growth). This increases the likelihood that dividend growth will continue as the company focuses on increasing shareholder value.
TAL International Group
TAL International Group, Inc. (NYSE:TAL), one of the world’s oldest and largest lessors of intermodal freight containers to shipping line customers, offers a yield of 6.2% on a payout ratio of 59% of the current-year EPS estimate and below 40% of adjusted pre-tax EPS. Its dividend growth over the past five years averaged 10.4%. This company operates in a high-growth market, in which it controls a 13% share. TAL International Group, Inc. (NYSE:TAL)’s revenue earning assets have grown at a CAGR of 18% over the past seven years and a CAGR of 20.3% over the past three years—with the majority of growth coming from Europe and Asia. Adjusted pretax income has increased at a robust 27.3% CAGR over the past three years.
Given that 73% of its fleet is contracted on long-term and finance leases (lease duration of 44 months, on average), TAL International Group, Inc. (NYSE:TAL)’s revenue and cash flow streams are generally secured and predictable, which makes a solid case for TAL International Group, Inc. (NYSE:TAL) as an income play. The company’s fundamentals are strong, as demand for leased containers remains firm amid tight global supply of containers relative to cargo volumes and container demand. Moreover, average lease utilization is close to record levels at 97.7% and strong asset residual values provide downside protection.
Given that containerization trade growth trends correlate with GDP growth patterns, acceleration in global economic growth will support further improvement in TAL International Group, Inc. (NYSE:TAL)’s underlying fundamentals. (The company states that “most of (its) dividends have been treated as a non-taxable return of capital.”)
Omega Healthcare Investors
Omega Healthcare Investors Inc (NYSE:OHI), a REIT that provides financing and capital to long-term healthcare facilities, with a focus on nursing homes, boasts a portfolio of 477 healthcare facilities operated by 46 operators. The REIT offers a 5.7% distribution yield. Its payout ratio is 74% of adjusted FFO for 2013, based on the guidance midpoint. The company’s cash distribution has increased 10 times since the beginning of 2010, while its five-year historical distribution growth averaged 9.2% annually over the past five years. The company has shown a robust financial performance over the past several years, with revenues growing at a CAGR of 17.7% and adjusted FFO expanding at a CAGR of 12.6% since 2004. With a payout ratio below that of its peers as a group, and due to a continued FFO expansion expected amid steadily robust growth and acquisitions, further distribution increases are likely.
