Despite lingering fears over cuts to the U.S. defense budget and the predicted cyclical slowdown in the heavy equipment industry, Falls Church, Va.-based Northrop Grumman Corporation (NYSE:NOC) recently announced two definitive moves that will return capital to its shareholders and could boost its stock price over the long term. The first involves the expansion of a share repurchase program that will eventually authorize the buyback of $5 billion in Northrop shares. The second concerns a substantial boost to the company’s quarterly dividend.
Taken together, these moves suggest that Northrop’s management team has some confidence in the company’s ability to weather the coming storm. Although the company was already regarded as something of a “conservative cyclical” that attracts value-minded investors, it is likely to boost its reputation as a value play even further. Investors who wish to gain exposure to a major defense and aerospace contractor would do well to investigate this situation.
Share Buyback Authorization
Since it was already in the throes of a $1 billion share buyback program, Northrop Grumman Corporation (NYSE:NOC)’s announcement that it would add an additional $4 billion to the buyback fund was met with genuine enthusiasm. All told, the dual buyback programs could result in the repurchase and cancellation of up to 25% of the company’s total float by the end of 2015. In the absence of additional positive news, this could boost Northrop Grumman Corporation (NYSE:NOC)’s shares by 25% or more and put a hard floor on its sometimes-volatile stock price.
This aggressive repurchase plan will be financed with the company’s robust free cash flow. By preventing Northrop from dipping into its cash reserves or increasing its long-term debt, this plan of attack could shore up the company’s finances and make it attractive to value investors and potential buyers alike.
Northrop Grumman Corporation (NYSE:NOC)’s management team has quashed speculation that the buybacks will be made with an eye to turning the company into an attractive buyout target. However, it is clear that Northrop is smaller than some of its competitors and could easily be absorbed into a larger firm’s ecosystem. Its relatively healthy balance sheet lends further support to this thesis.
In addition to the repurchase program, Northrop also indicated that it would boost its quarterly dividend by 6 cents. This will result in a quarterly payout of 61 cents and an annualized yield of more than 3%. It should be noted that this dividend increase places Northrop Grumman Corporation (NYSE:NOC) in a favorable position relative to its defense-industry peers. For comparison, The Boeing Company (NYSE:BA)‘s dividend yield currently sits near 2%, and General Dynamic manages a payout of just over 2.5%. Even if Northrop’s stock price fails to appreciate at a brisk clip, this dividend offers investors the opportunity to “get paid for waiting.”