Northrop, This Way and That

Back in October 2003, fellow Fool W.D. Crotty posed the following question about defense powerhouse Northrop Grumman (NYSE: NOC) -- or more particularly, its stock price: "With the stock at around $85, Northrop shareholders who bought in above $100 in recent years are probably wondering when they can be happy again."

The answer, it would seem, is: "after 16 months and one stock split." Don't let the stock's current, post-split, $52.34 price tag fool you. While Northrop has taken a bit of a tumble due to the incessant rumors that the Pentagon plans to tighten its purse strings (how's that for a weird mental image?), Northrop today is actually priced just shy of $105 in pre-split dollars.

And speaking of dollars, the defense contractor reported that in 2004, it earned $3.03 per diluted share for its owners -- an increase of more than 30% over last year. What's more, it extracted these profits from revenues that were up just 13%. It accomplished this by boosting its operating margins to 6.7%, an increase of 100 basis points over last year. That helped to boost net earnings growth to 28%, with the extra 2% coming from stock concentration. Northrop reduced its diluted share count by 3.4 million shares -- 1% -- over the course of the year.

Sadly, though, that reduction failed to help shareholders as much as they might have hoped. For Northrop repurchased the shares at prices that were, on average, roughly 7.5% higher than the stock trades for today. While we generally consider share buybacks a good thing, a means of returning value to shareholders, it's still important to ensure that management only conducts share buybacks at attractive prices. And while reasonable minds may differ over what numbers qualify as "attractive," it's practically a no-brainer to say that buying at or near a stock's 52-week high is not the best way to maximize shareholder value.

In other defense industry news:

• General Dynamics (NYSE: GD) reported minimal free cash flow growth last week.
• Lockheed Martin (NYSE: LMT) won a contract to build the new Marine One.
• The Pentagon is mulling cuts in major weapons systems.
• And last but not least, e-warfare has arrived.

Fool contributor Rich Smith has no position in any of the companies mentioned in this article.