Northrop Grumman Corp. (NOC), the defense company, just hiked its annual dividend rate by almost 7%. This was based on its strong free cash flow (FCF) guidance. But NOC stock is down over 26% from its peak and well below its average historical yield.
Value investors like this and are shorting out-of-the-money (OTM) nearby expiry puts to set a lower buy-in point for an even higher yield. This article will show how this works.
Can’t Get Enough Options?: Join the list for Barchart’s daily unusual options report, delivered free.
NOC stock - last 6 months - Barchart - As of May 29, 2026 NOC closed at $563.68 on Friday, May 29. That's down 26.6% from its recent spike to $768.02 on March 2 (i.e., down $204.34 over the past 3 months or 88 days). In addition, NOC is back to where it stood before the Iran war and also its recent dividend hike.
Moreover, if tensions heat up again in the Iran war, as is clearly possible, NOC stock could turn around.
However, even if this doesn't happen, value investors believe NOC stock could rise 13% to 14%. That's based on its historical yield. Let's look at that point.
Average Yield Could Push NOC Stock Higher
On May 19, Northrop Grumman announced its quarterly dividend per share (DPS) rate would be $2.47. That works out to a forward DPS annual rate of $9.88, or +6.93% over the prior $9.24 DPS rate (i.e., $2.31 x 4).
That gives investors in NOC stock a forward dividend yield of 1.75% (i.e., $9.88/$563.68).
Over the trailing 52 weeks, NOC has traded between $472.02 and $774, according to Yahoo! Finance, or $623.01 on average. That is 10.5% over today's price, and its average yield has been 1.48% (i.e., $9.24/$623.01).
Moreover, over the last 5 years, Seeking Alpha reports that NOC's average yield has been 1.57%, and Yahoo! Finance reports that it's been 1.54%. In addition, Morningstar reports the average 5-year yield has been 1.53%.
So, if NOC were to trade at its historical average yield, including the past 12 months, it would move towards a 1.53% dividend yield. Here is what that implies for NOC stock:
$9.88 DPS / 0.0153 = $645.75 per share price target
That implies, if NOC were to revert to its historical mean yield, NOC stock will rise almost 15%:
$645.75 / $563.68 -1 = 0.1454 = +14.54% upside
FCF Guidance and Outlook Could Push NOC Stock Higher
Management has made clear that its free cash flow (FCF) can support this dividend increase. They maintained guidance in the April 21 Q1 earnings release that FCF will range between $3.1 billion and $3.5 billion this year.
That is despite the negative FCF in Q1, which typically happens every year. For example, in the trailing 12 months to Q1, Stock Analysis reports that its FCF was $3.3 billion, equal to its 2025 FCF performance.
Moreover, as there are now 142 million shares outstanding, the new $9.88 annual DPS rate will cost Northrop Grumman just $1.403 billion. That is well below the expected $3.3 billion for 2026. So, the company can easily afford this dividend rate hike. That could help push NOC towards its average historical yield.
In addition, analysts are now projecting $46.81 billion in revenue next year. If the company maintains its 7.80% FCF margin, FCF could rise to $3.65 billion next year.
As a result, using a 4.1% FCF yield metric (i.e., based on its $3.3 billion TTM FCF and its existing $80 billion market cap), NOC could be worth:
$3.65b / 0.041 = $89 billion
That's 11.25% higher than NOC's existing market cap. In other words, using FCF yield, NOC is worth 11.25% more, or:
$563.68 x 1.1125 = $627.09 per share
Using Forward P/E, NOC is Worth Just 1% More
Using Seeking Alpha's forward P/E average of 19.41x and analysts' 2027 $30.14 earnings per share (EPS) forecasts, NOC could be worth $585 per share:
19.41 x $30.14 = $585.02 per share
Using Morningstar's average forward P/E metric of 18.39x, NOC could be worth $554.27. So, on average, using forward P/E, NOC is worth just over Friday's close, i.e., $569.65, or 1% higher.
Summary of Valuation Estimates for NOC
These three methods show that there is a range of fair value estimates for NOC:
Average Dividend Yield …………. $645.75 +14.5%
FCF Yield Valuation ……………….. $627.09 +11.3%
Forward P/E Metrics ……………… $569.65 +1.0%
Average Fair Value …………………….$614.16 +9.0%
That is about where it has traded over the last year (see above), or $623.
Note that there is no guarantee NOC will rise from here. As a result, one way to set a lower buy-in price and get paid while waiting is to short out-of-the-money (OTM) puts.
Shorting OTM NOC Puts
For example, the June 18 expiry option chain shows that the $545.00 put option contract has a midpoint premium of $8.40. That implies a short-seller of these puts can make an immediate yield of 1.54% over the next 19 days (i.e., $8.40/$545.00).
NOC puts expiring June 19 - Barchart - As of May 29, 2026 This means an investor first secures $54,500 in cash or buying power with their brokerage firm (i.e., to potentially be assigned to buy 100 shares at $545.00 if NOC falls to that price). The account will then receive $840 after entering a trade to “Sell to Open” 1 put contract at $545.00
Even if NOC 3.3% falls to $545.00 on or before June 18, and the collateral is assigned to buy 100 shares, the investors' breakeven point is lower:
$545 - $8.40 = $536.60 breakeven point
As a result, the investor gains an annual dividend yield of 1.84% (i.e., $9.88/$536.60). That is much higher than its historical rate of 1.53%, implying a potential upside of 20%:
$645.75 / $536.60 -1 = 0.2034 = +20.34% upside
Moreover, investors can repeat this play each month even if NOC remains over this strike price. That way, the investor can enhance the expected return.
The bottom line is that NOC stock looks cheap here using three different valuation methods. One way to play it is to short our-of-the-money (OTM) put options in nearby expiry periods.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
More news from Barchart
Northrop Grumman Just Hiked Its Dividend, But Its Stock Has Tanked - Time to Buy NOC? Unusual Options Activity Points to Boston Scientific Stock as a Hot M&A Target Marvell Technology Reports Strong FCF and Outlook - Could MRVL Move Higher? Unusual Options Activity in Key ETFs Unveils 3 Trade Ideas Here