Aerospace & Defense behemoths are praised among investors for their extended dividend-growth track records. Two of my favorite dividend growth names in the industry are Northrop Grumman Corporation (NYSE: NOC) and General Dynamics Corporation (NYSE: GD), which boast 19 and 31 years of consecutive annual dividend increases, respectively.
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If you haven’t noticed already, the ongoing geopolitical landscape favors defense stocks considerably. Thus, Northrop Grumman and General Dynamics enjoy quite strong market tailwinds these days. Both companies enjoy enhanced earnings-growth visibility powered by strong order activity and growing order backlogs. Thus, Northrop Grumman and General Dynamics should continue serving dividend-growth investors quite satisfactorily in 2023 and further into the future.
Ukraine Needs Supplies: Northrop Grumman & General Dynamics Deliver
As is the case with most major defense companies these days, Northrop Grumman & General Dynamics produce weapons systems and equipment that have been critical components in the West’s efforts to arm Ukraine.
Canada, for instance, diverted 39 light-armored vehicles initially ordered for the country’s own army to donate them to Ukraine. These light-armored vehicles were manufactured by General Dynamics in London, Ontario. The Canadian Canadian military then ordered another 39 similar vehicles from General Dynamics for $165 million to replace them.
Northrop Grumman’s supplies have also been vital for the success of the Armed Forces of Ukraine on the battlefield. The company manufactures Bushmaster automatic cannons and midsized ammunition, which have been delivered to Ukraine from U.S. government stockpiles. Northrop’s RQ-4 Global Hawk aircraft have been conducting regular lookout flights over the Ukrainian border on behalf of the U.S. and NATO allies as well.
And remember, everything that is being sent to Ukraine from stockpiles needs to be replaced back home, which means that General Dynamics and Northrop Grumman will keep receiving replenishment orders that take years to complete. Thus, both companies are currently accumulating a great order backlog.
Expanding Backlogs to Assist with Earnings, Dividend Growth
As Northrop Grumman & General Dynamics receive an overflow of orders from the U.S. and its allies resulting from the tailwinds created by the ongoing, unfortunate war, their backlogs keep expanding. Chubby backlogs are crucial for defense contractors, as they provide enhanced cash-flow visibility and, thus, predictable earnings growth prospects – and what follows earnings growth? Dividend growth, of course!
General Dynamics’ Backlog
In its Q3 earnings report, General Dynamics revealed that the sum of all its backlog components stood at $125.8 billion at the end of the quarter. The company’s book-to-bill ratio stood at 1.15, which effectively means General Dynamics is receiving more order value than its production capacity rate. Also, because General Dynamics’ annual revenue run rate is around $38 billion, the current backlog should provide roughly 3.3 years’ worth of cash-flow visibility. Management also commented that the orders pipeline remains very active, indicating that this trend will be supported, moving forward.
Northrop Grumman’s Backlog
When it comes to Northrop Grumman, the company’s Q3 earnings results revealed third-quarter net awards totaling $8.7 billion, boosting its backlog to $79.6 billion. Similar to General Dynamics, Northrop is currently signing more rates than its delivery rate, resulting in its backlog growing 5% year-to-date. Management projects that this backlog will result in accelerated growth going into 2023 and sees favorable future order flow as well. Again, the result is high cash-flow visibility, with the company recognizing nearly $35 billion in sales per annum in recent years.
Is NOC Stock a Buy, According to Analysts?
Northrop Grumman stock has a Moderate Buy consensus rating based on eight Buys and six Holds assigned in the past three months. At $547.50, the average Northrop Grumman price target suggests 3% upside potential.
Is GD Stock a Buy, According to Analysts?
General Dynamics stock has a Strong Buy consensus rating based on 11 Buys and one Hold assigned in the past three months. At $281.00, the average General Dynamics price target suggests 12.8% upside potential.
Takeaway: Which is the Better Dividend-Growth Stock?
As we discussed, both Northrop Grumman and General Dynamics are two great defense dividend-growth stocks moving into 2023, as robust backlogs should keep fueling earnings growth and, thus, higher payouts. But which is the better dividend-growth stock between the two?
I would argue that both companies offer relatively similar dividend prospects. General Dynamics comes with a yield of 2%, while its payout ratio stands close to 41%. Northrop Grumman currently yields a lighter 1.3%, but its payout ratio of 28% should allow for more substantial dividend hikes, moving forward. This is reflected in both General Dynamics and Northrop Grumman’s existing dividend-growth trends, with their five-year dividend growth CAGRs standing at 8.5% and 11.6%, respectively.
Regardless, both stocks should keep growing their distributions at a higher rate than inflation. This is quite impressive given their mature multi-decade dividend-growth track records, which is a testament to their operational excellence too.
