It has been a busy couple of years for defense and security firms. Since 9/11 spending on security and defense technology has risen sharply and this has been assisted by increased spend around conflicts in Afghanistan and Iraq.
While these have been major drivers for firms like Northrop Grumman (NOC), the company is also involved in a variety of other security and engineering businesses including shipbuilding, space technology and cyber-security related applications.
With 120,000 staff servicing a variety of industries, Northrop Grumman (NOC) is one of the largest security companies in the world.
An investment in a defense related company is not for everybody, but there are two aspects which bear consideration when looking at Northrop (NOC). One is the low forward price to earnings (PE) multiple of just eight times earnings and the second is the dividend yield of around 3.2%
Shareholders have been rewarded for strong performances over the past 60 years. Since 1951 the company has not skipped a dividend payment.
Reporting first quarter earnings in April, management at the company raised its earnings guidance for the remainder of the financial year.
"This was a solid quarter for Northrop Grumman (NOC). Based on this quarter's strong EPS growth, we now expect earnings per share of $5.75 to $6.00. Although cash flow was seasonally low, we are on track to achieve our 2010 guidance. Looking ahead, we are focused on continuing to drive performance improvements that create value," said Wes Bush, chief executive officer and president.
The earnings guidance was slightly higher than the $5.70 indicated when the company prepared to delivered full-year results.
First quarter earnings were up 24% to $765 million from $619 million in the prior year period, and as a percent of sales increased to 8.9% from 7.8%, which represents a significant improvement over the previous trading year where the company delivered a net loss for the year of $1.3 billion, or $3.77 per share.
For the full year the company expects to have free cash-flow of between $1.7 billion and $2.2 billion.
While the global financial crisis and fiscal austerity measures have dampened some demand for defense and security spend, there remain a number of hotspots around the world including Iraq, Israel, Iran and Korea and these are likely to drive continued demand for the products and services offered by the sector.
With that in mind Northrop Grumann (NOC) could prove to be a defensive dividend play for investors in the coming years.
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