Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Northrop Grumman Corporation (NYSE:NOC) is about to trade ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 6th of September will not receive this dividend, which will be paid on the 25th of September.
Northrop Grumman’s next dividend payment will be US$1.32 per share, on the back of last year when the company paid a total of US$5.28 to shareholders. Based on the last year’s worth of payments, Northrop Grumman has a trailing yield of 1.4% on the current stock price of $367.87. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. 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. Fortunately Northrop Grumman’s payout ratio is modest, at just 25% of profit. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Fortunately, it paid out only 33% 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?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we’re glad to see Northrop Grumman’s earnings per share have risen 18% per annum over the last five years. The company has managed to grow earnings at a rapid rate, while reinvesting most of the profits within the business. This will make it easier to fund future growth efforts and we think this is an attractive combination – plus the dividend can always be increased later.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the last ten years, Northrop Grumman has lifted its dividend by approximately 13% a year on average. It’s exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
Is Northrop Grumman worth buying for its dividend? We love that Northrop Grumman is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. Overall we think this is an attractive combination and worthy of further research.
Curious what other investors think of Northrop Grumman? See what analysts 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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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.