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Huntington Ingalls Industries Dividend Analysis

This is a Dividend Analysis on HII

Pre-Amble

As you may or may not be aware, people can request an analysis on the stock of their choice on INVRS.  Sometimes something very interesting comes of of it and I want to present my finding on the blog.  However, I need to be respectful of the person who requested the stock and give them "alone" time with the information. 

In this case, during the period of silence, the company released quarterly earnings which caused the price of the shares to pop approximately $17.  I re-ran all of the analysis components to reflect the new numbers, and the company still has some favourable elements, but the weak points have to be looked out more carefully, especially since the margin of safety is not what it was earlier in the week.

Company Background

Huntington Ingalls Industries, Inc. engages in the shipbuilding business. It operates through the following business segments: Ingalls, Newport News, and Technical Solutions. The Ingalls segment develops and constructs non-nuclear ships, assault ships, and surface combatants. The Newport News segment designs, builds, and maintains nuclear-powered ships which include aircraft carriers and submarines. The Technical Solutions segment provides professional services, including fleet support, integrated missions solutions, nuclear and environmental, and oil and gas services. The company was founded on August 4, 2010 and is headquartered in Newport News, VA.
Founded: 2010
Number of Employees: 40000
Headquarters: Newport News US

The Models Used

This is a dividend analysis that looks at four areas in order to evaluate investment merit:
  • Number of years of uninterrupted dividend growth,
  • Total return,
  • Dividend coverage,
  • Relative valuation,
We're running this analysis against a portfolio of 5 stocks.  The other companies selected were chosen because they were in a related industry (Aerospace & Defense) and/or sector (Electronic Technology) and have a market cap close to HII's (10.3524B).

Peer Group:
Stock Name (Symbol)Last PriceMarket Cap
HEICO Corporation Class A(HEI/A:XNYS)$94.3012.6506B
HEICO Corporation(HEI:XNYS)$121.4316.2902B
FLIR Systems, Inc.(FLIR:XNAS)$52.977.1061B
Elbit Systems Ltd(ESLT:XNAS)$164.507.0329B

Why Are We Running The Model Against a Portfolio?

We could just get the score for your target company and it would be somewhat informative.  But when we run it against a portfolio of peers, that score gets much more illuminating. 
INVRS is designed for peer-based analysis.  We believe (and we're not alone) that analyzing a stock without a basis of comparison is like trying to understand the world with blinders on - a narrow perspective that can lead to all sorts of false assumptions and missed opportunities .  The ideal is to get as broad a perspective as possible - a panorama across data points, across time and across peers.  We call this three-dimensional analysis.

The Analysis

Years of Dividend Growth

This analysis was initially on a larger group of companies but the group was winnowed down to those that had at least five years of uninterrupted dividend growth.  Of the remaining companies, below is the number of years each company has grown their dividends per share year over year.

HII - 7 years
HEI/A - 12 years
HEI - 12 years
FLIR - 9 years
ESLT - 8 years at least

Total Return

For total return we're using the sum of the forward dividend and the 5 year growth rate of dividends.

Let's see the results.


 HII has a 48% total return - a 1% dividend yield plus a 5 year growth rate of 47%.  However, HII's dividend yield growth is decelerating.  Stability is more desirable than stratospheric numbers.  HII's 3 year return is 21%.  HEI and HEI/A have a 5 year and 3 year return of 15% and 14% respectively.   FLIR's 3 year return is higher than its 5 year - 14% to 12% and ESLT is 7% and 8% (3 year and 5 year).

This is weakest feature of HII. HEI or HEI/A are better choices for this factor.

Dividend Coverage

We want to see the dividend 75% or less of the free cash flow.  Here's a graph of the results.

They all have good coverage except for ESLT.

Relative Value

This is a dividend analysis so our basis of value is going to be relative to dividend yield.   The calculation we're using divides the forward dividend yield by the five year average dividend yield.
Here's the results.

Even after it's big price spike yesterday, HII is still trading at a relative discount to it's 5 year history.

Conclusion

The weakest part of this story is HII's total return.  I would rather see a higher dividend yield say in the range of 3 to 5% and a steadier growth rate and especially not one that is declining. 

There are a lot of stocks out there.  HII is definitely interesting, but I prefer to wait for the beautiful conjunction of all four factors.

Disclaimer


This is not intended to be a comprehensive analysis and we cannot be held responsible for any investment decisions you make.

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