Is This Dividend Heading for Choppy Waters?

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Though we’ve never covered this company, you may be familiar with shipbuilder Huntington Ingalls Industries (NYSE: HII), which carries a 2.35% yield.

Originally a part of the aerospace and defense powerhouse Northrop Grumman (NYSE: NOC), Huntington was spun off in 2011 when Northrop began to worry that the shipbuilding business would be a drag on its long-term growth.

Despite those fears, Huntington has done quite well on its own.

In 2012, it reported $6.71 billion in revenue. And every year since then, Huntington has consistently built on that stream thanks to its ability to secure huge contracts with customers like the U.S. Navy. Now it’s looking at more than $9.46 billion in revenue for 2021 and is expected to see $10.35 billion in 2022.

Plus, almost immediately after going independent, Huntington began to pay out a dividend… one it’s raised eight times since 2012. The company has never cut it.

Overall, the military shipbuilder has a solid business model that supports growing dividend payments.

But like other industries, the shipbuilding market is getting smarter and placing more emphasis on advancing technologies.

So in order to diversify, Huntington decided to pivot and announced a $1.65 billion acquisition of Alion Science and Technology.

Alion specializes in sensor technology as well as data analytics and tech engineering (to name a few sectors). The acquisition will also add nearly $3 billion in future business for Huntington and has more than $5 billion in estimated contract value.

Acquisitions are expensive, however, and Huntington plans on funding the takeover with debt.

This isn’t a red flag on its own. But keep in mind… we saw firsthand during the pandemic that companies with loads of ever-increasing debt were quick to cut or suspend their dividends.

In this case, though, Huntington seems to have a good handle on its obligations. Last year, Huntington boasted $757 million in free cash flow (up from $460 million in 2019). While this year’s free cash flow decreased to $245 million, it looks like the company used its cash to pay down debt.

Not to mention, next year’s free cash flow is expected to rebound to $569.4 million.

This year, the company is expected to pay out $172 million in dividends. That will give it a payout ratio of 76% – just a hair over SafetyNet Pro‘s 75% cutoff.

It might be a bit of a wait before the pivot pays off, but Huntington has a good track record of keeping debt under control, paying out dividends and growing its business.

So for now, the dividend is safe. However, if the Alion integration doesn’t go as smoothly as planned, investors wanting to hop aboard could be in for a rough ride.

Dividend Safety Rating: C

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