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The perpetual threat of Federal budget cuts to defense is starting to have an effect on investors. They're realizing that maybe the risks of spending cuts aren't such an imminent problem for defense contractors such as
Northrop Grumman (
NOC) -- the government would have to function for that to happen. That's a big part of why Northrop has rallied more than 24% in 2013.
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Northrop Grumman is indeed one of the country's biggest defense contractors. The firm is a key player in everything from computer surveillance to UAVs to more conventional products like the B-2 bomber. It's an understatement to say that Northrop carries some customer risks: 90% of revenues come from Uncle Sam's pocket book. But as NOC's offerings continue to skew more towards mission-critical areas like cybersecurity, it suddenly looks a whole lot harder to justify cutting NOC's programs versus a non-defense program with fewer consequences.
In the meantime, the firm has joined its peers in checking out its options. It's been ramping up its IT services business, reaching outside DoD and courting other agencies as well as friendly international governments that need Northrop's expertise. A nearly debt-neutral balance sheet and a 2.9% dividend yield make NOC look extra attractive in this extremely low-rate interest environment.