No one believes that either the oil price war between Russia and Saudi Arabia or the rapid spread of COVID-19 will improve in the next several months. The relative permanence of these situations has triggered what appears to be a deep recession and a sharp drop in asset values, particularly stocks. Yet, the heightened global tensions should benefit Northrop Grumman Corp. (NYSE: NOC) stock.
Defense Stocks Become Safe Havens
It would be hard to tell that the world is in trouble through the eyes of Northrop Grumman shareholders. The stock has recently traded near $300, which is in the middle of its 52-week range of about $385 to $263.
Compared to the Dow Jones industrial average, Northrop Grumman has done well. Its shares are down 22% year to date. The Dow is off 33% and the S&P 500 is off 31% over the same period.
Another aspect of Northrop Grumman’s investor strength is its dividend, which at $5.28 offers a yield of 1.86%. With the recent plunge in bond prices, that yield is all the more attractive.
Management Change, but Without Bad News
President and Chief Executive Officer Kathy J. Warden has helmed the company since last year. So far so good, as she enters what could be a decade of leadership.
At rival Lockheed Martin Corp. (NYSE: LMT), Marillyn Hewson, 66, is leaving the top spot with the Bethesda-headquartered defense contractor. Oddly, James Taiclet, the CEO of real estate investment trust American Tower Corp. (NYSE: AMT), will replace her. He has been on the Lockheed board since 2018 but was not a member of management. Maybe Lockheed does not have a deep bench.
Warden does have a deep bench. Mark A. Caylor, President, Mission Systems, and Blake E. Larson, head of defense systems, are well regarded. Both reportedly made over $6 million last year. Warden’s compensation was $13 million.
There Is Always a War Somewhere
The appetite for weapons worldwide is almost insatiable. It stretches well into the billions of dollars. In most of the nations that are major buyers of defense systems, the appetite is growing.
In 2018, some $1.8 trillion was spent on weapons. This is according to the Stockholm International Peace Research Institute’s “Trends in Military Expenditure 2018” report.
Spending by country was staggering. That year, U.S. purchases totaled $649 billion. China spent $250 billion, and Saudi Arabia spent $69 billion.
Obviously, the United States is Northrop Grumman’s largest client.
An analysis of the 20 companies profiting the most from war shows Northrop Grumman is the third-largest provider of weapons. Its revenue stream from this was $26 billion in 2018. The only companies ahead of it were Boeing Co. (NYSE: BA) at $29 billion and Lockheed Martin at $47 billion.
A period when tensions are high is a defense company’s dream. Today, much of that tension is in the Middle East. Israel remains an enemy of Iran, in part because of Iran’s efforts to gain nuclear weapons.
The conflict in Syria involves Russian and U.S. interests and clearly will last into the long term. Furthermore, the United States continues to have troops in Iraq.
Northrup Grumman Is Ready for More Global Conflict, and More Revenue
A look at the product arsenal shows how much firepower the company has. Northrop Grumman’s businesses are divided into five operations: Air, Cyber, Land, Sea and Space.
The major products from the Air division are the B-2 Spirit and B-21 Raider stealth bombers and the X-47B unmanned attack plane. It also builds radar and navigation systems.
The primary Cyber products are focused on the digital battlefield.
The Land segment focuses on weapons, mobile command centers and GPS-guided weapons.
In Sea, the focus is on production of a number of naval systems. These include submarine warfare, shipboard radar and anti-ship missile defenses.
Finally, Space focuses on space observatories and military space systems.
Across its product and service lines, Northrop Grumman has scores of projects.
The company has approximately 85,000 employees and more than 550 facilities in all 50 U.S. states and in more than 25 countries around the world.
Competitors include Boeing, Raytheon, Lockheed Martin, General Dynamics, Airbus, BEA, Rolls Royce (not the cars), United ShipBuilding, Harris, United Aircraft and Honeywell.