Northrop Grumman Corporation (NOC) provides systems, products, and solutions in aerospace, electronics, information systems, and technical service areas to government and commercial customers worldwide. Northrop Grumman has raised dividends for 10 years in a row. Over the past decade, it has managed to boost distributions by 13%/year. The outstanding shares from decreased from 368 million in 2003 to 237.5 million in 2013. The company has an open buyback facility to repurchase approximately 25% of outstanding shares by 2015. Analysts expect that this dividend achiever would earn $7.78/share in 2013 and $7.99/share by 2014. In contrast, it earned $7.81/share in 2012.
The past decade has been great for defense contractors in the US, with two major wars going on, and an increase in Federal spending. However, the next decade might look different, which is why I am not going to look at the past decades trends in earnings per share, dividends per share, payout ratios or returns on equity for Northrop Grumman.
I discussed that US defense spending is likely to contract in the near future, meaning in the next five years or so. However, in the long-run, it is quite possible that defense spending will be higher in 20 years. Actually, per the Sequester agreement in early 2013, defense spending is expected to fall by 6.40% in 2013 and 5.5% in 2014. After that, it is expected that increases will match increases in inflation through 2023, which is about 2% or so. Check this document for more information.
In an interview, famous investor Mohnish Pabrai discussed some of the three strategies for investment success by Charlie Munger. One of them was to focus on carnivores, or companies which have managed to repurchase a substantial amount of their shares. If a company manages to retire 20 – 25% of outstanding shares, and manages to maintain a consistent level of profits after that, it should deliver good returns to shareholders. With Northrop Grumman, the company has managed to consistently implement and execute programs to repurchase stock. If the company can maintain the level of sales and income, shareholders could reasonably expect another massive buyback program after this one is completed in 2015. While I usually prefer dividends over buybacks, I am open to companies regular repurchasing shares at attractive valuations.
When I looked at Northrop’s statement of cash flows, I uncovered a hidden gem. It looks like the company is drowning in cash. For example, in 2012 the company generated 2.64 billion in cash flow from operating activities, while Capex amounted to 331 million. The Capex figure was the lowest in the past five years however, as it was as high as $770 million in 2010. The lowest cash flow from operating activities over the past five years was in 2011 at $2.115 billion.
At the same time, the total amount paid on dividends distributed back to shareholders has been very stable in the range of $525 - $545 million per year. Despite the fact that dividends per share increased in each of the past five years, Northrop has managed to keep the total amount spent on distributions by repurchasing massive amounts of shares.
In fact, the company has managed to decrease the total number of shares outstanding from 354 million in 2007 to 237.50 million in 2013.
Northrop Grumman has managed to spend anywhere from $1.1 billion on share buybacks in 2009 to $2.3 billion in 2011. The company spent $1.3 billion on share buybacks in 2012.
Either way you look at it, the management of Northrop Grumman looks like a very shareholder friendly oriented management. Currently, the stock is attractively valued at 12.20 times earnings and yields 2.30%. This is a lower yield than Lockheed Martin's (LMT) over 4% yield, but it seems more sustainable. Although there is uncertainty over the US defense budgets, the consistent nature of share repurchases could translate into very good dividend and capital gains returns for investors who snap up these cheap shares today. I would consider adding to the stock on dips below $98/share ( equivalent to a 2.50% yield).
What is your opinion on the company?
- Check the Complete Article Archive
- Dividends versus Share Buybacks/Stock repurchases
- Should Dividend Investors be Defensive about these five stocks?
- Lockheed Martin Corporation (LMT) Dividend Stock Analysis
This is a guest post written by Retire Before Dad. He writes about dividend investing, personal finance and travel at the Retire Before Dad...
S&P 500® Dividend Aristocrats measure the performance S&P 500 companies that have increased dividends every year for the last 25 con...
This is a guest post from Roadmap2Retire blog , which documents the retirement journey of a dividend growth investor from Canada. I am an ...
Investing in dividend growth stocks has been a winning investment over the past 8 – 10 years. I myself have invested in dividend growth stoc...
I have shared with you early in the year, that I am essentially living off dividends and side income in 2016. I am saving my other income i...
This is a guest post written by Ben Reynolds at Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth ...
I believe that diversification is the only free lunch in investing. However, different investors have different takes on the topic of diver...
As an investor, I have always believed in diversification . I would rather err on the side of caution, rather than swing for the fences. It ...
The Procter & Gamble Company (PG), together with its subsidiaries, manufactures and sells branded consumer packaged products worldwide....
Unilever PLC (UL) operates in the fast-moving consumer goods market in the Africa, Americas, Asia Pacific, Europe, and Middle East. The comp...