Northrop Grumman Corporation (NYSE:NOC) stock is about to trade ex-dividend in 3 days time. This means that investors who purchase shares on or after the 21st of February will not receive the dividend, which will be paid on the 11th of March.
Northrop Grumman's next dividend payment will be US$1.32 per share. Last year, in total, the company distributed US$5.28 to shareholders. Looking at the last 12 months of distributions, Northrop Grumman has a trailing yield of approximately 1.4% on its current stock price of $370.94. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. That's why it's good to see Northrop Grumman paying out a modest 39% of its earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Fortunately, it paid out only 29% of its free cash flow in the past year.
It's positive to see that Northrop Grumman's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Northrop Grumman earnings per share are up 6.0% per annum over the last five years. Management have been reinvested more than half of the company's earnings within the business, and the company has been able to grow earnings with this retained capital. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past ten years, Northrop Grumman has increased its dividend at approximately 13% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
To Sum It Up
Has Northrop Grumman got what it takes to maintain its dividend payments? Earnings per share growth has been growing somewhat, and Northrop Grumman is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Northrop Grumman is halfway there. There's a lot to like about Northrop Grumman, and we would prioritise taking a closer look at it.
Ever wonder what the future holds for Northrop Grumman? See what the 17 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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