Northrop Grumman Corporation: A Dividend Stock with Major Upside Ahead?
This Dividend Stock Offers More Than a Dividend
If an income investor wants to earn more than just dividends, then they should seriously consider adding Northrop Grumman Corporation (NYSE:NOC) to their watchlist.
As a defense contractor, Northrop Grumman isn’t really known as an income investor’s favorite. However, the company does return cash to investors on a regular basis. And over the past several years, those cash payouts have been on the rise.
Consider this: in 2013, Northrop Grumman paid total dividends of $2.38 per share. In 2018, the amount had grown to $4.70 per share. So in just five years, the company has more than doubled its payout. (Source: “Northrop Grumman Corporation Dividend Date & History,” Nasdaq, last accessed March 27, 2019.)
Trading at $263.90 apiece at the time of writing, NOC stock offers an annual dividend yield of 1.8%.
Now, I know what you are thinking: a 1.8% yield really isn’t much. But as I mentioned earlier, this is a company that’s set to provide more than just dividends.
How’s that possible?
Well, because at the current price, Northrop Grumman Corporation is severely undervalued compared to its peers. And if its valuation picks up, the stock could see some serious upside.
Why Investors Need to Check Out Northrop Grumman Stock
Northrop Grumman comes from the aerospace and defense industry, which has an average price-to-earnings (P/E) ratio of 39.64 times. The company itself, on the other hand, has a P/E multiple of just 14.77 times. (Source: “Northrop Grumman Corp (NOC.N),” Reuters, last accessed March 27, 2019.)
Moreover, Northrop Grumman Corporation’s P/E ratio is lower than other big-name defense contractors, including Lockheed Martin Corporation (NYSE:LMT), Boeing Co (NYSE:BA), and Raytheon Company (NYSE:RTN).
And that’s not all. NOC stock currently has a price-to-sales ratio of 1.5 times and a price-to-cash-flow ratio of 11.44 times. The average price-to-sales and price-to-cash-flow ratios for the industry, on the other hand, is 1.74 times and 17,76 times, respectively.
However you look at it, Northrop Grumman stock appears really cheap compared to its peers.
And we know that value cannot go unnoticed forever. Once market participants realize the potential of this company, NOC stock could get a solid boost.
Of course, sometimes a low valuation ratio is simply an indication of a lack of growth. Is that the case here?
Not really. According to the latest earnings report, Northrop Grumman Corporation generated $8.2 billion in sales in the fourth quarter of 2018, representing a 24% increase year-over-year. In full-year 2018, the company’s top line grew 16% from 2017 to $30.1 billion. (Source: “Northrop Grumman Reports Fourth Quarter and Full-Year 2018 Financial Results,” Northrop Grumman Corporation, January 31, 2019.)
The bottom line improved as well. In 2018, Northrop Grumman’s net income rose 13% from 2017 to $3.2 billion, or $18.49 per diluted share.
Note that the amount easily covered the company’s total dividends of $4.70 per share paid for the year.
For the current year, things could get even better. Management is guiding a revenue of $34.0 billion for full-year 2019, which would mark another 13% increase from 2018. Earnings are also expected to improve and come in at a range of $18.50 to $19.00 per share for the year.
Final Thoughts on NOC Stock
There are two key takeaways here. First, despite not being a market favorite from a valuation perspective, Northrop Grumman Corporation is still delivering impressive growth numbers. And if that growth trend continues, NOC stock could justify a much higher price tag, or at least catch up to its peers.
Second, the company has a solid track record of raising its dividends and its payout ratio remains low. Therefore, if business continues to go well at this defense contractor, Northrop Grumman stock investors will likely be rewarded with bigger dividend checks down the road.
As it stands, NOC stock looks like an opportunity.