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.
Dividend Increase
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.”
Competition
As a manufacturer of defense electronics, information systems and aerospace equipment for private businesses and national military groups alike, Northrop Grumman competes with some of the most recognizable industrial concerns on the planet. Chicago-based The Boeing Company (NYSE:BA) and cross-town rival General Dynamics Corporation (NYSE:GD) are two of its closest competitors.
Of these three companies, Northrop Grumman Corporation (NYSE:NOC) has the smallest valuation by a decent margin. Its $20 billion market capitalization is about four times smaller than that of The Boeing Company (NYSE:BA) and about 50% smaller than that of General Dynamics Corporation (NYSE:GD). However, it is the most profitable of the three firms: Its final profit margin of nearly 8% beats out Boeing’s 5% figure and General Dynamics’s minus 1% miss.
It achieved this result on the strength of $2 billion in 2012 profit and $25 billion in gross revenues. By comparison, The Boeing Company (NYSE:BA) earned $4 billion on revenues of about $81 billion. General Dynamics Corporation (NYSE:GD) lost $325 million on just over $31 billion in revenues. Northrop Grumman Corporation (NYSE:NOC) also has a juicy levered free cash flow figure of nearly $2.2 billion. This compares to $1.2 billion for Boeing and $3.2 billion for General Dynamics.
Adding It Up: Value Play or Value Trap?
The idea that Northrop Grumman Corporation (NYSE:NOC) could eventually become a takeover target for a larger competitor like General Dynamics Corporation (NYSE:GD) or Raytheon Company (NYSE:RTN) is intriguing. Regardless of whether the company represents a compelling value at its current levels, its status as a possible acquisition play might make it more attractive than it otherwise would be. By attracting interest from more aggressive investors and traders, this status is also liable to lend additional support to Northrop’s stock price.
Even if a buyout does not come to pass, it is important to put Northrop Grumman Corporation (NYSE:NOC)’s capital-return blitz into perspective. As bloggers and market-watchers have astutely noted, the company’s moves will effectively return capital to shareholders at a 12% annual rate. This rate of return comes without many of the risks that usually attend pure dividend yields of 12%.
In sum, Northrop Grumman Corporation (NYSE:NOC)’s capital-return measures make it a nearly irresistible value play for investors with any affinity for the potentially volatile defense space. The possibility that the company may eventually be tapped as a takeover target could provide additional support for its stock price. Going forward, value investors and arbitrage-seekers alike would do well to keep Northrop Grumman on their watch lists.
The article This Company Looks to Return Capital to Shareholders in a Big Way originally appeared on Fool.com.
Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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