Earnings Roundup: LMT, PG, MMM, GE, JNJ, VZ

By Brian Nelson, CFA

Lockheed Martin’s (LMT) Backlog Reaches Record Highs

Dividend Growth Newsletter portfolio holding Lockheed Martin reported solid fourth-quarter 2023 results January 23 that showed a beat on both the top and bottom lines, but revenue growth remained challenged in the quarter, declining on a year-over-year basis. The defense contractor continues to be shareholder-friendly, returning a nice chunk of the $6.2 billion in free cash flow it generated during 2023. Lockheed Martin ended the year with a record backlog of $160.6 billion and remains well-positioned to support the U.S. and its allies with myriad defense technologies. The company is targeting 2024 revenue in the range of $68.5-$70 billion, a modest increase from the $67.6 billion it posted in 2023, while diluted EPS for the year is targeted in the range of $25.65-$26.35 (down from $27.55 per share in 2023). Lockheed Martin’s free cash flow is expected in the range of $6-$6.3 billion for 2024, about in-line with 2023 levels. We’re sticking with Lockheed Martin as an idea in the Dividend Growth Newsletter portfolio as key aerospace and defense exposure. Shares yield ~2.8%.

Procter & Gamble’s (PG) Gross Margin Surprises to the Upside

On January 23, Procter & Gamble reported mixed fiscal second-quarter 2024 results that showed revenue missing slightly on the top line and non-GAAP earnings per share beating the consensus forecast. In the fiscal second quarter, organic sales advanced 4% thanks to strength in Hair Care, Grooming, Oral Care, and Fabric and Home Care, while currency-neutral core net earnings per share jumped 18% on a year-over-year basis due to improvement in its core operating margin. The company’s gross margin advanced 590 basis points on a currency-neutral basis in the quarter thanks to productivity savings, favorable trends in commodity costs, and pricing strength — the latter contributing 190 basis points to the increase. Three-to-five percent organic growth is targeted in fiscal 2024, and we expect P&G to continue to be a strong free cash flow generator to drive continued dividend increases in the years ahead. We’re huge fans of P&G, and its long dividend growth track record is quite appealing. Shares yield ~2.5%.

3M’s (MMM) Outlook for 2024 Disappoints, Still Mired in Litigation

3M reported disappointing fourth-quarter results on January 23 that showed revenue pressure, but a modest beat on the bottom line versus the consensus estimate. Adjusted sales fell 0.3% in the quarter on a year-over-year basis, while adjusted organic sales dropped 1.4%. 3M’s adjusted earnings per share advanced to $2.42 from $2.18 in the year-ago quarter thanks to improvement in its adjusted operating income margin, and while 3M remains a strong free cash flow generator, its bottom-line outlook for fiscal 2024 disappointed investors. Adjusted earnings per share is targeted in the range of $9.35-$9.75 for 2024, below the consensus forecast ($9.82), while adjusted total sales growth is expected in the range of 0.25-2.25%, with organic growth expected to be flat to up 2%. The company continues to work through litigation issues with respect to faulty earplugs and forever chemicals (PFAS). We think 3M is facing too many headwinds at the moment, and with so many other companies out there with less “hair” on them, we’re steering clear of shares. The company’s dividend yield stands at ~5.6%.

General Electric (GE) Set to Split into Two Independent Companies This Year

General Electric reported decent fourth quarter results on January 23 that beat on both the top and bottom lines. The company experienced a nice 13% increase in organic revenue in the quarter, while organic orders advanced 7% on a year-over-year basis. The company will split into GE Aerospace, which focuses on Commercial Engines and Services, and GE Vernova, which focuses on Renewal Energy and Power, in April of this year. 2023 was a transformative year for GE, and the company’s stock revealed a company that is now back on track, with shares up more than 64% over the past 52 weeks. Management expects both GE Aerospace and GE Vernova to experience “further revenue, profit and free cash flow growth” in 2024, and we were pleased to hear the news. In particular, GE Aerospace is targeted to grow adjusted revenue in the low double digits, generate operating profit of $6-$6.5 billion, and haul in more than $5 billion in free cash flow on the year. Though we won’t be pulling the trigger on GE at this time due to the complexities surrounding the split-up, we may look to add GE Aerospace to the Best Ideas Newsletter portfolio when it becomes an independent entity given the strong long-term backdrop for commercial aerospace, despite recent hiccups at Boeing (BA).

Johnson & Johnson (JNJ) Reaffirms Guidance for 2024

On January 23, Johnson & Johnson reported strong fourth quarter results revealing a beat on both the top and bottom lines. For the quarter, operational growth, excluding its COVID-19 vaccine, totaled 10.9%, while adjusted earnings per share advanced 11.7% — both solid clips. For the full year, its Innovative Medicine division, excluding its COVID-19 vaccine, experienced 7.2% operational revenue growth, while its MedTech segment witnessed 7.8% operational sales expansion, excluding contributions from its Abiomed acquisition. Johnson & Johnson reaffirmed its guidance for 2024 calling for operational sales expansion in the range of 5%-6% and adjusted operational EPS growth of $10.55-$10.75, showcasing growth of 7.4% at the midpoint. J&J remains a strong free cash flow generator, and dividend growth investors are huge fans of its long track record of payout increases. We like J&J quite a bit, but we won’t be adding it to the newsletter portfolios anytime soon. Shares yield ~2.9% at the time of this writing.

Verizon’s (VZ) Free Cash Flow Continues to Improve

Verizon reported in-line fourth-quarter results on January 23, but the company’s net additions across the board offered investors a reason to cheer its report. Fixed wireless net ads grew 31% in 2023, while total wireless postpaid net ads grew 26% on the year. Total wireless postpaid phone ads increased to 449,000 in the fourth quarter of 2023 compared to just 217,000 in the same period last year. Consumer postpaid phone gross additions posted one of its best quarters in four years. Though 2023 was a challenging year for both operating revenue and adjusted earnings per share, the company’s cash management improved, with free cash flow generation increasing to $18.7 billion on the year from $14.1 billion in 2022 as capital spending eased to $18.8 billion in 2023 from $23.1 billion in 2022. Free cash flow in 2024 should remain robust, as Verizon is targeting capital expenditures to continue to fall on the year, to the range of $17-$17.5 billion, while adjusted EBITDA growth is targeted in the range of 1%-3%. Investors should expect Verizon to continue to trade at a low valuation multiple, however, given its huge net debt position. Shares yield ~6.7%.