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The board of directors of Northrop Grumman Corporation (NOC - Analyst Report) has given approval to repurchase the company's common stock worth $4 billion. This is the additional share buyback limit over the existing level of $1 billion. With this new approval, the company currently has total outstanding share repurchase authorization of $5 billion. This move will lower the effective cost of equity and increase retained earnings level.

As of March 31, 2013, Northrop Grumman had outstanding shares of approximately 235 million. The company intends to use the share repurchase fund to retire approximately 25% of its shares outstanding. The company would like to exercise this option within 2015, subject to suitable market condition and at the discretion of the management.

During the first quarter of 2013, Northrop Grumman repurchased 6.5 million shares of its common stock with an average price of $70.15.

Northrop Grumman will utilize its own cash and free cash flow to finance this share repurchase, and if required, the company will issue debts to fund this transaction. The company’s cash balance as of Mar 31, 2013 was $3.2 billion. Northrop Grumman’s strong cash position provides substantial financial flexibility and a cushion through an ongoing share repurchases along with distributing incremental dividends.

Recently, the board of directors of Northrop Grumman increased its quarterly dividend by 11% bringing the annualized payout to $2.44 per share from $2.20 per share earlier. After the hike, quarterly dividend will come to 61 cents per share, up from the prior payment of 55 cents per share. The new annual dividend yield will be 3.09%, which is higher than the industry average of 2.06%. Northrop Grumman’s practice of raising dividend from time to time will benefit the stock as it attracts investor attention.

Northrop Grumman currently has a Zacks Rank #2 (Buy). Apart from Northrop Grumman, other stocks in the sector that are worth considering include Erickson Air-Crane Incorporated (EAC - Snapshot Report) with a Zacks Rank #1 (Strong Buy), and Wesco Aircraft Holdings, Inc. (WAIR - Snapshot Report) and Alliant Techsystems Inc. (ATK - Analyst Report) with a Zacks Rank #2 (Buy).

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