Last week, Northrop Grumman (NOC) announced an 8.3% increase to its dividend.
This brings its dividend growth streak to a very respectable 18 years.
Northrop Grumman is one of the world’s largest defense contractors, producing a wide variety of weapons and military technologies. Much of what Northrop Grumman produces centers around aircraft, missiles, sensors, and systems. The company divides its business into four segments: Aeronautics Systems, Defense Systems, Mission Systems, and Space Systems. Some of the more notable programs that the company is involved in include: B-2 Spirit Bomber, B-21 Raider, F-35 Lightning, F-18 Super Hornet, Ground Based Interceptor, Ground Based Strategic Deterrent, and NASA’s Space Launch System.
As a defense contractor, Northrop Grumman’s primary customer is the United States government, which accounts for over 80% of company sales. The company’s current backlog totals close to $80B, equivalent to more than 2 years of revenue.
As priorities for government spending shift, Northrop Grumman works to reposition its portfolio to take advantage of new opportunities. A couple of years ago, the company acquired Orbital ATK to bolster its offerings in the Space sector. Recently, Northrop divested its underperforming IT services business.
Northrop Grumman has a long history of paying dividends. However, it was not until the early 2000s that the company began regularly increasing its dividend. Over the last decade, Northrop Grumman has increased its dividend at a 13.1% compound annual growth rate. That means that this year’s 8.3% increase is a bit smaller than usual.
Northrop Grumman shares now pay $1.57 quarterly dividends, which translates to a yield of just under 1.7%. The payout ratio of 26% is quite safe, and gives plenty of room for the company to continue increasing dividends. Northrop Grumman holds an BBB+ credit rating.
In addition to its dividend program Northrop Grumman is also quite active in repurchasing its shares. Over the last decade, the company has reduced its shares outstanding by over 40%.
Northrop Grumman earnings are relatively insensitive to the economic environment, as most of their business comes from government contracts. Republican administrations are commonly associated with increased defense spending, while Democratic leaders are seen as favoring spending on social programs. Analysts are currently forecasting that Northrop Grumman’s earnings will grow at mid-single digit rates for the next couple of years.
So is it worth picking up a few shares of Northrop now? The stock trades at slightly over 15 forward P/E ratio. That’s reasonably close to fair value compared to its historical range of 12-17 times earnings. As is the case with most government contractors, there is always some concern that the administration may change its mind on its budget and spending priorities. But, it may be a good idea to buy into any temporary selloffs, as the company has shown it is capable of continual steady growth even in challenging political climates.
Happy Investing
Justin is the curator of the Dividend Champions list, a monthly publication of companies with a history of consistently increasing their dividends. His primary investing focus is in deep value and dividend paying stocks, but he is constantly exploring alternative strategies. Justin has a Ph.D in Chemistry from Rice University and earned the CFA Institute Investment Foundations certificate. He is a contributor to The Dividend Kings marketplace service and a valuable asset to the Wide Moat Research team.
