Northrop Grumman will spend its cash buying back shares.
The board of Northrop Grumman (NYSE:NOC), the Wall Street Journal reports, has just authorized the company’s management to buy back $3 billion of shares next year. That means that the company will return $3 billion to its shareholders, rather than investing it in its own future. That means that the company believes that the financial markets as a whole provide better opportunities for returns than NOC shares. That means that Northrop Grumman’s management, if nothing else, has the honesty to call its company’s prospects a worse-than-average investment. That means that Northrop Grumman is not, as the hubris of many other corporate managers might want us to think, a Lake Wobegon company. It is not, in Garrison Keillor’s famous formulation, as above average as all the rest.
To be fair, as the WSJ went on, the boards of Lockheed Martin and L-3 Communications have approved similar measures for 2015; Northrop’s is merely “the most aggressive repurchase plan in the sector”. And why not? CEO Wes Bush worked three and a half years at Northrop’s CFO, so he knows how to run a company by the numbers. And as Callan opines this week, the defense contracting “Primes Appear to See Little Risk to [the] Defense Outlook.” Or as the chief of strategy for a somewhat smaller (but still large) contractor commented to me a few weeks ago, contracting with the Pentagon follows a Pareto principle today: the bulk of the Pentagon’s equipment spending flows through the five largest contractors, and the bureaucracy cannot conceive of doing otherwise. Until that changes, there’s little reason for the incumbents to invest over the top in their future. That future is as secure as the budget’s top line—moving sideways yes, but not collapsing. In that regime, your customer will do the investing for you; in that context, the proper use of your cash is to stuff it in an envelope and mail it home. So, if you’re following the industry, don’t hate the player—just hate the game.
James Hasík is a senior fellow at the Brent Scowcroft Center on International Security.