Sunday, August 16, 2020

The flight to quality - Northrop Grumman

Well it took us forever, some might say a ridiculous amount of time considering how long it's been since the March lows but we finally made it.

We opened up a sizable position in Northrop Grumman (NOC)

By rights we should have just got on with it back in March and been done with it but it was just a high price to pay, it was too off-putting to pay that much. Or so we thought back then.. So what changed our minds and convinced us to to buy it in the low 300's? Way more than the 280 we should have got it for?

A fresh mindset change has a lot to do with it, a major brain shift away from companies that have just gotten too frustrating. I think we're still just a little fatigued with our investments in companies where the business model has been affected so rapidly by the pandemic and if we're being honest at 170 companies the portfolio was getting a little portly and could easily shed a few pounds.

Something we can also point to is perhaps more of a fundamental investor maturity shift too. I think you can only mutter the line "phew, in-line dividend for another quarter" so many times before you genuinely start to ask yourself aren't we all better than this? Personally it's getting old checking for or trying to predict the next dividend reset.

But the type of high quality stocks we're talking about don't honestly pay a fraction in yield to our outgoing REIT's and big oil. Sorry, it is what it is.

Yes, but that's where they got us anyway. It was pretty much a fools errand to look at that high yield in resetters like WELL, EPR and VTR and believe they were going to weather a condition as extreme as this pandemic. But for each of these you have an OHI, NNN or NHI hanging in there pretty well. So yes, agreed it's a lot harder to pick longer term winners nowadays than it looks, they might look the same but they don't taste the same.

A lot of the trades from back in March have now actually been dropped (in the green thankfully) to continue purchases in what we view as higher quality names. Additional to our Honeywell, Raytheon, L3, Parker-Hannifan, Norfolk Southern, Wisconsin Energy and Home Depot purchases back then we have now added more utilities like PEG, AVA, Hawaiian Electric Preferred's (HAWEL and HAWEM) not to mention more names such as US Bancorp (USB) , Automatic Data Processing (ADP) and the Preferred's of Popular Bank in Puerto Rico (BPOPM and BPOPN) as well as Becton Dickinson (BDXB)

The backbone of the portfolio has to be strong otherwise the entire thing just flops over..

The advantage of BPOPM and BPOPN being that these are monthly payers which means we see a more regular dividend flow like we get from the Gladstone family of Preferred's (GOOD,GAIN and LAND) love those monthly payouts.

The Preferred's in these cases trade extremely thin and can go weeks with 0 volume but it seems like that's life with these, they just aren't your run of the mill regular trades covered by the TV networks and Seeking Alpha pundits and comments section rotten tomato throwers.

But getting back to Northrop Grumman. I realize we're getting emotional about stocks again, but it has to be said, awesome company. Started out as Grumman Aerospace which produced some stellar military aircraft some of which transitioned to become Gulfstream aircraft under General Dynamics. Having spent time on the old G450 production line I can vouch that Grumman produced some outstanding product which GAC then proceeded to build it's name on, over-Engineered if anything. The type of over-Engineered quality we now ourselves figuratively look for in the portfolio.

But like us in many respects Northrop then dropped the volatile, cyclical side of the portfolio to focus on it's core competencies. Pretty much the same thinking that gave Lockheed it's current success, they dropped the civil side and kept the gold mine. This is likely to make GD itself a screaming buy if and when they choose to spin off Gulfstream in our opinion. Same for Boeing Defense and Space, the place is like a flowing money stream getting dammed by the volatile passenger aircraft side. It's hard to summon up the interest in BA until we can get our hands on BDS alone and that X-37 not to mention that AWACS fleet. Now there's a poster child for a quality dividend!! Salivating at the thought...

Post Gulfstream though the company has become a solid and well diversified military player alongside the likes of Lockheed Martin, L3, General Dynamics and Raytheon with stellar cashflow and a conservative dividend to boot.

As with all these diversified military corporations though does the current 1.71% dividend set the world alight? No but that is the key reminder that Covid has re-iterated, diversified cashflow and lots of it with a conservative longer term growing dividend and low debt are the components we need to still see in all our investments moving forward. Fact is they always were but to our discredit the guard dropped in the euphoria of FIRE passive income and a lofty stock market, we can now never let our guard drop through greed from the lure of a tasty yield ever again. Quality quality quality..

The only further question, valuation will only be resolved with a decision on the occupant of the oval office which could initially affect valuation to the positive or negative making NOC a buying opportunity or a long term hold. Without the benefit of a crystal ball we really cannot answer that one right now.

Long NOC, LHX, GD, RTX, PH, HON, NSC, WEC, HD, BDXB, ADP, PEG, AVA, OHI, NNN, NHI, HAWEM, HAWEN, BPOPM, BPOPN, GOODN, LANDP.

Happy investing!

Love to all,

DD4L










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