Northrop Grumman: Dividend Growth Stock Analysis

The defense industry holds a number of appealing stocks for dividend growth investors. Constant geopolitical concerns and steadily rising defense budgets in the U.S. and around the world provide a strong backdrop for the biggest defense companies.

For example, Northrop Grumman (NOC) stock generated annual returns of 19% over the past five years. It has crushed the S&P 500 Index in the same period, by nearly eight percentage points a year.

Northrop Grumman offers a sustainable dividend along with the potential for high rates of growth going forward, making it one of the top industrial dividend stocks in the market today.

Fueling Growth Through Acquisitions

Northrop Grumman has a long history going back to its first aircraft, a patrol bomber for the Norwegian Air Force, in 1940. The company’s B-2 stealth bomber took its first flight in 1989. In 1994, Northrop purchased Grumman Corporation, builder of the Lunar Module that landed on the moon in 1969. Today, Northrop Grumman is an aerospace and defense giant with a market cap of $45 billion.

Northrop Grumman has greatly benefited from the global economic growth over the past 10 years, along with rising defense budgets around the world. 2018 was a very strong year for the company. Revenue increased 24% to $8.2 billion for the fourth quarter, and 16% for the full year to $30.1 billion. For 2018, adjusted EPS improved 52% to $21.33

The company enjoyed broad-based growth. Aerospace Systems posted sales growth of 6% for the quarter and 8% for 2018, due to volume growth for manned aircraft and space programs. Revenues from the Innovative Systems division were higher by 7% for the quarter and 17% for the year. Defense systems had strong international growth for the Advanced Anti-Radiation Guided Missile program. Mission Systems saw revenues inch up 2% for both the quarter and full year.

Northrop Grumman’s future growth will be fueled largely by acquisitions. Last year, Northrop Grumman acquired Orbital ATK for $9.2 billion. Orbital ATK is the largest supplier of ammunition to the U.S. government and has contracts with NASA to provide the rockets used to travel to the International Space Station.

While this purchase will add to the Northrop Grumman’s debt level, long term Orbital ATK will be accretive to earnings. The combined backlog of the two companies totals more than $60 billion. This bodes well for the company’s future growth. Orbital ATK is expected to add about $2 billion to full-year sales in 2019.

Defend Your Portfolio With Dividends

Last year was a very strong one for Northrop Grumman, and the company expects continued strength in 2019. Northrop Grumman expects sales from the F-35 program to grow at by at least a mid-single digit rate in 2019. Northrop Grumman expects adjusted EPS to range between $18.50 to $19.00 in 2019.  Revenue is expected to be ~$34 billion, with free cash flow between $2.6 billion and $3.0 billion.

Such a high rate of profits and cash flow will allow Northrop Grumman to continue rewarding shareholders with huge cash returns. The company returns cash through share repurchases and dividends. On January 4^th, the company completed its previously announced $1 billion accelerated share repurchase. Northrop Grumman has approximately $4.1 billion remaining on its share repurchase authorization.

Northrop Grumman currently pays an annualized dividend of $4.80 per share, which represents a yield of 1.8%. The company also grows its dividend each year, at a high rate. Last year, Northrop Grumman raised its dividend by 9%, and it is likely a double-digit raise is in order for 2019.

Northrop Grumman stock has high appeal for growth and income investors. The fundamentals of the defense industry remain very attractive for investment. The company is a cash flow machine and rewards shareholders with generous cash returns.