Northrop Grumman's next dividend payment will be US$1.45 per share, and in the last 12 months, the company paid a total of US$5.80 per share. Last year's total dividend payments show that Northrop Grumman has a trailing yield of 1.7% on the current share price of $337.86. 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 investigate whether Northrop Grumman can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Northrop Grumman paid out a comfortable 38% of its profit last year. A useful secondary check can be to evaluate whether Northrop Grumman generated enough free cash flow to afford its dividend. The good news is it paid out just 25% of its free cash flow in the last 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Northrop Grumman earnings per share are up 7.6% 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. Organisations that reinvest heavily in themselves typically get stronger over time, which can bring attractive benefits such as stronger earnings and dividends.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Northrop Grumman has lifted its dividend by 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.
Is Northrop Grumman worth buying for its dividend? 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. It might be nice to see earnings growing faster, but Northrop Grumman is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about Northrop Grumman, and we would prioritise taking a closer look at it.
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