Which Military Stock Is Best?

Raytheon parent company, RTX (NYSE:RTX), and Northrop Grumman (NYSE:NOC) are two of the most critical aerospace defense companies providing advanced technology to the United States military.

As government contractors with highly stable lines of revenue, these two companies are also reliable dividend-paying assets for investors but which is the better investment opportunity?

Why Should I Buy RTX Stock?

RTX is a massive producer of missiles, targeting systems, detection systems and related defense technologies.

Listed among its current contracts are a $3.2 billion radar system for the US Navy, a $1.2 billion contract for the benefit of Ukraine’s military and a nearly $1 billion contract for the development of hypersonic missile technology.

RTX currently trades at fairly attractive multiples for a dominant, mature company. At 14.6 times forward earnings and 9.6 times cash flow, RTX is priced at a level that will likely make it attractive to value investors.

Analysts forecasts also suggest that the stock may be trading below its fair value. The consensus 1-year price target for RTX shares is $84, representing a 14.7 percent upside from the most recent price of $73.26.

Over the next 5 years, the company’s earnings are expected to grow at a compounded annual rate of 10.3 percent, offering RTX shareholders potentially steady returns over the coming half decade, even as the shares continue to kick off significant dividends.

Is Northrop Grumman a Good Stock to Own?

Like RTX, Northrop Grumman is a major force in aerospace and has a secure revenue line through its portfolio of long-term government contracts. Among these are a $13 billion contract for replacement of the US ballistic missile force and a contract for ICBM maintenance that extends through 2040.

The company also manufactures and services a line of advanced stealth planes for the US Air Force.

With such an important role in advanced US defense efforts, Northrop Grumman is likely to be a stable, reliable asset for investors to hold for many years to come.

Northrop Grumman trades at a higher premium to its earnings than RTX at a multiple of 21.6. Its price-to-cash-flow, however, is still an attractive 14.1.

At the moment, Northrop Grumman is trading very close to its fair value. Analyst price targets suggest NOC could reach as high as $492.50.

It should be noted that Northrop Grumman may be in for a slow growth period. Analysts currently estimate earnings per share growth of 4.8 percent over the next five years, well below the projected rate for RTX.

Even with the slower period of growth ahead, Northrop Grumman still seems to be a good stock to hold. With a solid market position and a fair valuation, the company is unlikely to encounter serious competitive threats in the near term.

How Much Does RTX Pay Compared to Northrop?

While Northrop Grumman appears to be a very solid stock to own, RTX may be the better choice for investors seeking near-term dividend income.

RTX shares currently pay $2.36 annually, reprensenting a yield of 3.2 percent. Northrop Grumman, by contrast, pays out $7.48 per share and yields a much more modest 1.5 percent.

It should be noted, however, that Northrop Grumman may be the better long-term dividend growth choice between the two stocks.

Although RTX’s yield is considerably higher today, the company’s dividend payout ratio is 62.6 percent. Northrop’s payout ratio is a much lower 24.8 percent, providing management with more cushion room to allocate earnings to progressively higher dividends.

Over the next 3 years, RTX is expected to raise its dividend at a compounded annual rate of 5.1 percent. Northrop’s dividend growth is projected to be nearly identical. On a longer horizon, though, it’s likely that Northrop will be able to sustain a slightly higher growth rate due to its much lower payout ratio.

Northrop vs RTX Track Record

Looking at historical performance, both RTX and Northrop Grumman have proven themselves to have significant staying power in the aerospace and defense industry.

Since 2013, RTX has raised its revenues from $62.31 billion to $70.57 billion in the most recent 12-month period. Northrop Grumman has enjoyed even more drastic growth, rising from $24.98 billion in revenue a decade ago to $37.88 billion over the past year.

Northrop Grumman also maintains a clear edge in terms of its 10-year track record of earnings growth. For example, in 2013, RTX generated a net profit of $5.72 billion. Now at $5.54 billion, the current trailing 12-month net profit is virtually identical. Northrop, meanwhile, has grown its net income from $1.95 billion to $4.65 billion over the same period.

These numbers are also reflected in the recent dividend growth rates of Northrop and RTX. Over the last 10 years, RTX’s dividend has increased at a compounded annual rate of 5.4 percent. Northrop Grumman’s rate over the same period has been nearly 12 percent.

While the two companies are expected to raise their dividends at similar speeds over the next few years, these rates demonstrate Northrop’s greater ability to increase rates due to its faster earnings growth.

It’s also worth noting that both companies have raised their dividends successfully in a variety of market conditions. Northrop Grumman has increased its dividend for 20 consecutive years, while RTX has maintained a 30-year streak.

These streaks have taken the companies through both the 2008 financial crisis and the 2020 turbulence, demonstrating their resilience to macroeconomic conditions that are more difficult for companies without large government contracts to navigate.

RTX Stock vs. Northrop Grumman: Which Is Best?

Both RTX and Northrop Grumman appear to be good dividend stocks to own at the moment. Even with Northrop Grumman’s growth slowing, neither one of these companies appears to be overvalued or in danger of losing significant ground.

Given that both companies have maintained multi-decade revenue increase streaks and neither are facing financial impediments, it’s likely that both will continue to provide shareholders with a predictable flow of dividend income.

For most investors, RTX is likely the better of these two stocks to buy at the moment. With a more attractive valuation, higher growth projected over the next five years and an already high dividend, RTX appears likely to produce solid returns in the form of both price increases and ongoing distributions. Taking all of this into account, RTX appears to be the better of two reasonably good stocks in this case.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.