Summary
- Huntington Ingalls Industries displays some robust financials.
- The stock is an optimal pick for dividend growth investors, with shares trading at an attractive valuation.
- We project double-digit investor returns in the medium term, even if shares retain their current, arguably low valuation.
- While some risks remain, we rate shares a Buy due to its multiple qualities.
Not many have heard of Huntington Ingalls Industries (HII). The company was spun out of Northrop Grumman (NOC) in 2011. Shareholders received one share in the new company for every six shares of Northrop Grumman they owned. Similar to its ex-parent company, Huntington Ingalls operates in the aerospace & defense sector.
Last month we covered Lockheed Martin (LMT), our favorite company in the industry, powered by robust government-sourced cash flows. Overall, we believe that aerospace and defense make for a great investing environment in uncertain economic environments, such as the current one. Our search for profitable opportunities in the sector led us to Huntington Ingalls, which has displayed some very investable characteristics.
The company primarily builds nuclear and non-nuclear ships for the U.S. Department of Defense. Its business is divided into three segments: Newport News Shipbuilding, Ingalls Shipbuilding, and Technical Solutions.
- Newport News produces nuclear-powered aircraft carriers and submarines.
- Ingalls builds surface combatant ships, amphibious assault ships, and Coast Guard cutters.
- Technical Solutions provides fleet preservation and modernization, IT support, nuclear management, and oil and gas engineering.
Because the company's primary customer is the U.S. government, the company enjoys predictable cash flows, which has allowed it to return capital to shareholders consistently.
In 2019, 2018, and 2017, approximately 87%, 88%, and 87%, respectively, of HHI's revenues were generated from the U.S. Navy, and approximately 4%, 5%, and 6%, respectively, were generated from the U.S. Coast Guard. Therefore, the company has only a tiny part of its revenues attached to commercial demand, which would make it subject to the consumers' purchasing power and overall economic conditions.
We believe that the stock is an incredible dividend growth investment opportunity, whose returns should be uncorrelated to those of the overall market.
