Some of the world’s best investors stick to dividend portfolios. They know that a steady stream of income is a top wealth building strategy. And finding the best deals is vital. So today, we’re going to review another one of the best dividend stocks around. Let’s take a look at L3 Technologies’ dividend history and safety…
Business Overview and Highlights
L3 Technologies is a $17 billion business. They supply communications, intelligence, surveillance, and reconnaissance systems and products. Some of their biggest customers are the Department of Defense, Department of Homeland Security, U.S. Government Intelligence agencies, and NASA. The company is based out of New York, NY and they employ 31,000 people. Last year L3 Technologies pulled in $10 billion in sales and that breaks down to $330,000 per employee.
The company operates within the industrial sector and maintains a solid credit rating (BBB-) from the S&P. This allows L3 Technologies to issue cheap debt to expand operations and finance other initiatives.
In February L3 Technologies raised their quarterly dividend from $0.80 to $0.85 per share. The 6.3% increase was made payable to March 15 to shareholders of record on March 1.
Also, L3 Technologies is in the middle of a merger with Harris Corporation. The merger is expected to finalize sometime this year pending regulatory approvals. The merger could make L3 Technologies Harris one of the country’s biggest defense contractors.
10-Year Dividend History
The company paid investors $1.4 per share a decade ago. Over the last 10 years, the dividend has climbed to $3.2. That’s a 129% increase and you can see the annual changes below…
The compound annual growth is 8.6% over 10 years… but over the last year, the dividend climbed 6.7%. The slowdown in dividend growth isn’t a great sign. Although, L3 Technologies still might be a good income investment. Let’s take a look at the yield…
Current Yield vs. 10-Year Average
L3 Technologies’s long history of paying dividends makes it one of the best dividend stocks around. This also makes the dividend yield a great indicator of value. A higher yield is generally better for buyers. Sustainability is also vital, and we’ll look at that soon.
The dividend yield comes in at 1.58% and that’s below the 10-year average of 2.38%. The chart below shows the dividend yield over the last 10 years…
The lower yield shows that investors have bid up the company’s market value. They might be expecting higher growth and payouts. But more often than not, the dividend yield is mean reverting with share price changes.
Improved Dividend Safety Check
Many investors look at the payout ratio to determine dividend safety. They look at the dividend per share divided by the net income per share. So, a payout ratio of 60% would mean that for every $1 L3 Technologies earns, it pays investors $0.60.
The payout ratio is a good indicator of dividend safety, but accountants can manipulate net income. They adjust for goodwill and other non-cash items. A better metric is free cash flow.
Here’s L3 Technologies payout ratio based on free cash flow over the last 10 years…
The ratio is fairly steady over the last 10 years and the trend is up. The last reported year shows a payout ratio of 31.4%. While the payout ratio has increased, there is still room for L3 Technologies’ board of directors to raise the dividend.
Good investing,
Robert
