Yahoo Finance Strength in Aerospace Market Aids Howmet (HWM) Amid Cost Woes
Howmet Aerospace Inc. HWM is benefiting from strength in the commercial aerospace market. The strength in air travel continues, as it has throughout 2023, with wide-body aircraft demand picking up, supporting continued OEM spending. The pickup in air travel is positive for the company because the increased use of aircraft spurs spending on parts and products that HWM provides. It also encourages airlines to buy more aircraft, which again drives Howmet’s sales.
An expanding defense budget is a growth catalyst for Howmet. While the commercial aerospace market has been the company's major driver, the industry's defense side has also been witnessing positive momentum, cushioned by steady government support.
It is worth noting that in December 2023, U.S. President Joe Biden signed the U.S. defense policy bill that authorizes a record $886 billion in annual military spending, thereby increasing the nation's total national security budget by about 3%. Such improved budgetary provisions set the stage for Howmet by focusing on the defense business to win more contracts, which is likely to boost its top line.
HWM’s measures to reward its shareholders through dividend payments are noteworthy. In the first three months of 2024, Howmet paid out dividends worth $21 million and repurchased shares for $150 million. In September 2023, the company hiked its dividend by 25% to 5 cents per share (20 cents annually). Subject to its board’s approval, the company expects to hike the dividend rate by 40% to 7 cents in the third quarter of 2024.
In the year-to-date period, shares of the Zacks Rank #3 (Hold) company have gained 45.6% compared with the industry’s 18.1% growth.
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Howmet has been dealing with the adverse impacts of the high cost of sales. In 2023, the cost of goods sold jumped 16.3% year over year to $4.8 billion due to increasing input costs. Selling, general, administrative and other expenses also increased 15.6% year over year in the same period due to higher employment costs and legal fees. The trend continued in the first quarter of 2024, with the cost of goods sold rising 10.8% to $1.2 billion. Selling, general, administrative and other expenses grew 17.3% to $88 million in the quarter. Escalating expenses, if not controlled, might hurt the company’s bottom line in the quarters ahead.
Howmet’s international presence exposes the company to the risks of adverse currency fluctuations. This is because a strengthening U.S. dollar would hit profit margins unless offset by higher prices in locations outside the United States. Thus, adverse currency movements are worrisome for the company.
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