Northrop Grumman Corp. (NOC) is one of the global leaders in the defense and aerospace industry. The defense technology firm operates in several mission-critical areas and is one of the largest federal defense contractors. The company’s sectors include aeronautics, defense systems, mission systems, and space systems.
Due to international tensions, the stock has received elevated attention lately and is up over 11% year-to-date, or 38% over the past 12 months. This stock is attractive for investors interested in dividend growth, safety, and secular industry tailwinds. However, its recent rise has been fueled by momentum, and the stock may retreat a bit in the short-term.
The Geopolitical Situation
The Russian invasion of Ukraine has caused a painful humanitarian crisis. It has been more than three weeks since hostilities began, and a ceasefire does not seem imminent.
As a consequence, the 30 NATO countries are on high alert. First, there is the fear that fighting could spill over into NATO territory leading to a broader conflict. Second, many nations have pledged to increase their defense spending as a result.
Germany is one notable example, which pledged to increase defense spending to at least 2% of its GDP and more than double expenditures from 2021 to 2022. This spending plan includes funds for the F-35 fighter jet made in the U.S. The expensive aircraft is built by Lockheed Martin, with several essential components provided by Northrop Grumman. This is just one example of the defense spending that will emerge from this conflict. It’s also a safe bet that the U.S. will solidify its already immense defense budget.
Steady income for investors
Northrop Grumman offers investors a steady and growing source of dividend income. The company is currently paying $1.57 quarterly and yielding just under 1.5%. The dividend has been rising for 18 straight years.
This makes the stock a terrific pick for dividend growth investors. As the dividend rises, the investor’s effective yield also rises. For instance, five years ago, the stock traded around $245 per share. Investors who purchased then would now have an effective annual yield of 2.6% and a 73% capital gain.
In this way, a stock like Northrop Grumman is unlikely to make an investor rich, nor will it experience the volatility of other sectors and potentially cause massive capital losses. It is an excellent stock for long-term investors to bank consistent, reliable income and weather market turbulence; however, it may underperform the overall market over time.
Examining 2021 earnings
Full-year sales for 2021 came in at $35.7 billion. This is a 3% decrease from sales in 2020. Both aeronautics and defense systems revenue was down, with space systems posting an impressive 24% rise. Recent events indicate that aeronautics and defense systems have an opportunity to rebound in 2022 and beyond.
While top-line sales were down slightly in 2021, operating income rose 1%, with a small margin increase. The company is forecasting a 10% compound annual growth rate in adjusted free cash flow (FCF) through 2024, with FCF increasing from $2.65 billion in 2022 to $3.25 billion in 2024. This bodes well for the continued return of capital to shareholders through share repurchases and dividends.
Wall Street‘s Take
Over on Wall Street, analysts are moderately bullish on Northrop Grumman stock.
NOC maintains a Moderate Buy consensus rating based on three Buys and seven Holds. The high number of Hold ratings indicates that Wall Street does not expect significant capital gains from this stock. It is more appropriate for defensive and dividend growth investors.
The average Northrop Grumman price target of $454.87 implies a 6.73% upside.
A Solid Pick for the Right Investor
Northrop Grumman has experienced a jump in share price as investors digest two significant issues. First, the Russian invasion of Ukraine will likely cause NATO countries to increase defense spending. Second, the current stock market has led many investors to look for a safe haven due to rising inflation and upcoming interest rate hikes. Dividend growth investors could consider Northrop Grumman.
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