If World War 3 Breaks Out, Own This Stock

With news breaking recently of a drone attack by Ukraine on Moscow, it appears the stakes have risen and tensions escalated.

Amid the backdrop of war, defense contractors are a natural play on the markets. And they don’t necessarily even need the US to get involved to benefit.

Reportedly, President Biden stated that many of the so-called aid packages to Ukraine are in fact funds that never leave US shores but instead land in the coffers of defense contractors, who provide armaments and artillery. So with those insights, is Northrop Grumman a good stock to own?

Key Points

• Conflicts like the Russia-Ukraine war have boosted global defense spending, benefiting Northrop Grumman’s sales of advanced military technologies.
• Despite favorable market conditions, Northrop Grumman’s recent earnings were mixed, resulting in modest stock gains this year.
• The company offers reliable dividends and shareholder returns, with a forecasted 16.9% annual net income growth over the next five years.

What Exactly Does Northrop Grumman Do?

Northrop Grumman (NYSE:NOC) is an American aerospace and defense technology company that has extended its offerings to include exploration and discovery.

For example, it was instrumental in the Apollo Lunar lander shuttle and played a crucial role in flying the Apollo 13 crew back home.

But make no mistake about it, Northrop is first and foremost a prominent player in the aerospace and defense sector and, as a result, of technological advancements is a go-to player for those in power looking to support national security. The question to answer is whether that’s good business and good for investors.

Geopolitical Issues Garnering Renewed Attention

The business environment is heavily connected with the geopolitical environment, including the Russia-Ukraine conflict, war in the Middle East, and others that directly impact defense firms like Northrop Grumman.

As these wars persist, they naturally lead to demand for ever more sophisticated defense products, which in turn positively impacts Northrop and its rivals whose business is defense.

The conflict in Ukraine with Russia resulted in further tension within the European continent and across the globe that led to an increase in the defense budget of NATO members and other countries globally.

Military chiefs and government leaders around the world have turned to Northrop Grumman in an effort to upgrade equipment, including surveillance and reconnaissance, as well as to develop enhanced missile defense systems.

That’s no surprise given that Northrop has expertise ranging from aerospace systems and cyber security to missile defense. When the writing is on the wall, or the contracts, what it means is rising revenues to Northrop for surveillance drones, superior radar technologies, and missile defense systems.

Israel, for instance, has always spent a lot in its defense systems, for which various components are provided by Northrop Grumman. As tensions escalate in the middle east, high-end security technologies provided by Northrop have led to a stream of contracts and partnership opportunities.

A less talked about phenomenon but a very real one is that these conflicts contribute to a general tendency in the world to enhance the military budgets. In preparation for what may come, governments are virtually obligated to spend ahead of time in order to increase their military capabilities and readiness.

To highlight just the scale of this spending, Stockholm International Peace Research Institute’s estimates show that global military expenditures reached a record $2.4 trillion in 2023.

And yet in spite of the all the positive trends in the defense sector, surprisingly, Northrop stock is up just 10% so far this year, lagging the major market averages. So why the underperformance?

How is Northrop’s Financial Performance?

To gain a snapshot of how Northrop has been doing, we examine its last full year of financials.

Northrop Grumman’s recent results have fallen short of investor expectations despite increased defense spending. In the fourth quarter of 2023, the company reported a net loss totaling $535 million, or $3.54 per share, compared to earnings of $13.46 per share in the same period the previous year. Full-year earnings per share fell by 57% year-over-year to $13.53.

The decline was mainly due to a $1.17 billion after-tax charge on the B-21 program and a $316 million after-tax mark-to-market expense. Despite these challenges, sales rose 7% year-over-year, reaching $39.29 billion in 2023.

More recently, Northrop Grumman quickly rebounded from its fourth-quarter losses. In Q1 2024, the company reported net earnings totaling $944 million, or $6.32 per share, up from $842 million, or $5.50 per share in the same period last year. Sales also grew 9% year-over-year, reaching $10.1 billion.

With its share price essentially tracking its sales blip, how do the dividends look to income-oriented investors?

Attractive Dividend Payments

Thanks to quite reliable government contracts, and as a mature and financially secure aerospace and defense company, Northrop has the luxury of being able to consistently pay dividends.

These days, Northrop pays an annual dividend of $8.24, which translates to a yield of 1.57% based on present levels.

The company’s dividend payouts have increased at a CAGR of 9.3% over the past five years and has a record of raising its dividends for 20 consecutive years.

In addition to dividends, Northrop Grumman has a pretty solid history of being shareholder friendly and engaged in share repurchase programs, further enhancing shareholder value. Last year, the company returned $2.6 billion to shareholders through dividends and share repurchases.

Is Northrop Grumman a Defense Stock You Should Own?

Northrop Grumman is widely regarded as a good defense stock to own because of its stable contracts, predictable defense spending, growing dividend payout, and attractive valuation.

Speaking of valuation and what Northrop might actually be worth, among 22 analysts the consensus fair value for the stock is $523 per share, suggesting the current share price is right around its intrinsic worth.

Trading at a 33x price-to-earnings multiple, it appears Northrop Grumman is fully valued right now based on earnings but it should be noted that net income is forecast to grow at a rapid rate of 16.9% annually over the next 5 years suggesting it may not be priced at the premium that the PE ratio might have investors believe at first glance.