A Top 2021 Stock for Dividend Safety and Total Return

In addition to a market-beating yield and a long history of dividend growth, investors should also consider dividend safety to be a top priority for 2021. While the end of the coronavirus pandemic is on the horizon, the U.S. economy remains in a fragile position and is likely to see sluggish growth at least for the first quarter. As a result, investors looking for a combination of dividend yield, growth, and safety should prioritize blue-chip stocks that have dependable dividends, even if the economy enters a double-dip recession. Northrop Grumman is very attractive for its tremendous dividend safety. We also believe it has the highest expected rate of return for 2021 and beyond, due to its attractive valuation, future growth potential, and 2% dividend yield. Growth Takes Flight Northrop Grumman is one of the largest U.S. aerospace and defense contractors It operates four business segments: Aeronautics Systems, Mission Systems, Defense Systems, and Space Systems. The company manufactures a wide range of products and services, including aircraft, radars, information technology, missile defense, and more. Some of its core programs include the B-2 Spirit stealth bomber, E-2D Advanced Hawkeye and E-8C JSTARS. Northrop Grumman has a long history of growth, and the company has continued to generate growth even in 2020. In the 2020 third quarter, revenue and earnings per share both increased 7% year over year. The Aeronautics Systems posted 5% revenue growth due to higher volumes across multiple products. Separately, Mission Systems and Space Systems both generated double-digit sales growth for the quarter. Over the first three quarters combined, Northrop Grumman's revenue increased 6% while EPS increased 9% compared to the same nine-month period the year prior. The company has performed very well over the course of 2020, all things considered. Future growth is highly likely for Northrop Grumman. Fundamentally, it has a very recession-resistant business, as global defense will always have a certain level of demand. The company ended the most recent quarter with a total backlog at a record of more than $81 billion, with a strong book-to-bill ratio of 2.2x. Looking forward, we believe the company will achieve both revenue and EPS growth through its involvement in the F-35, B-21, E2-D and other platforms. Share buybacks will contribute to EPS growth as well. In the most recent quarter, Northrop Grumman reduced its diluted shares outstanding by 2% from the same quarter last year. Overall, we expect average annual EPS growth of 10% out to 2025. This high growth rate is achievable largely because of the company's competitive advantages. Specifically, its main competitive advantage is its entrenched positioning as a leading defense contractor. Its various core programs such as the B-2, B-21, E-2D, E-8C, Global Hawk and Triton platforms all have a long runway of growth. Northrop Grumman's large (and growing) backlog should fuel strong EPS growth for many years. Shareholders will naturally benefit from this growth. Defend Your Portfolio With a Safe and Growing Dividend We assess stocks based on a number of characteristics such as earnings quality, ability to generate steady profits in a recession, and payout ratio. Stocks that possess highly profitable business models, durable competitive advantages, and have long histories of annual dividend growth are most attractive. Northrop Grumman is just such a company. It has increased its dividend for 17 consecutive years, a period of time that encompassed both the Great Recession of 2008-2009 as well as the current coronavirus pandemic. Even in a highly challenging environment in 2020, Northrop Grumman increased its dividend by 10%, an impressive raise given the difficult economic conditions. Consensus estimates call for EPS of $24 in 2021 for Northrop Grumman. With a forward annual dividend payout of $5.80 per share, Northrop Grumman has a projected dividend payout ratio of 21% for 2021. This indicates a very high level of cushioning for the dividend, with plenty of room for continued dividend increases at a high rate next year and beyond. The current dividend yield of 2% may not be too impressive for income investors, but it still beats the average yield of the broader S&P 500 Index (currently at 1.6%). Therefore, Northrop Grumman is an above-average dividend stock. It also provides a high level of dividend growth each year. With expected EPS of $24 for 2021, Northrop Grumman stock trades for a P/E ratio slightly above 12. This is a fairly low valuation multiple for a highly profitable and growing business, with competitive advantages and a leading position in its industry. We believe a P/E ratio of 15 is a better estimate of fair value for this high-quality business. An expanding P/E multiple to 15 would boost annual returns by 4% per year. Final Thoughts The best dividend stocks combine a market-beating yield, a long history of dividend growth, and a safe dividend payout. In addition to all these qualities, Northrop Grumman also possesses competitive advantages and a recession-resistant business model. Combining expected EPS growth with an expanding valuation multiple and the 2% dividend yield leads to total expected returns of 16% per year over the next five years.

A Top 2021 Stock for Dividend Safety and Total Return

The best dividend stocks combine a market-beating yield, a long history of dividend growth, and a safe dividend payout.

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