As Rep. Paul Ryan (R., Wis.) picks up the gavel of the Speaker of the House, he has vowed to pursue the same conservative fiscal policies that he championed as Budget Committee chairman, which include big cuts in defense spending. These fiscal concerns currently weigh on the shares of defense contractors that otherwise have bright prospects and should be trading at higher valuations.
Case in point: Harris Corp. (HRS) , an international communications and information technology company that not only offers capital appreciation but steady income as well.
On Tuesday morning, Harris announced fiscal first-quarter earnings that beat expectations and showed why companies with major Pentagon business remain poised for long-term gains, regardless of the political food fights on Capitol Hill.
You've probably never heard of Harris. The Melbourne, Fla.-based company is a Fortune 500 company with a market cap of $9.85 billion, but it doesn't get the same headlines as, say, Lockheed Martin or General Dynamics.
And yet Harris is a strong dividend payer that belongs in your portfolio, for growth as well as income.
As worldwide defense spending shows more strength than widely anticipated and the beleaguered civilian aerospace market shakes off its slump, companies with longtime expertise in aircraft electronics will emerge as huge winners. Harris is well positioned to gain from these trends by virtue of its innovative products and client diversification.
On Tuesday, Harris reported revenue in the first quarter of fiscal 2016 of $1.81 billion, compared with $1.16 billion in the same quarter a year ago. Earnings came in at $148 million, or $1.18 per diluted share, compared with earnings of $125 million, or $1.18 per diluted share, in the same year-ago quarter. Adjusted for costs related to mergers and acquisitions, earnings reached $1.31 per share, which beat expectations of $1.28 per share.
Harris' higher first-quarter results were driven by the company's $4.75 billion acquisition of defense communications firm Exelis in the fourth quarter of fiscal 2015.
Harris came into the new fiscal year with a huge backlog of orders; management expects full-year earnings in the range of $5.60 to $5.80 per share.
Harris reorganized at the beginning of fiscal 2016 into four new business segments: Communication Systems, Space and Intelligence Systems, Electronic Systems and Critical Networks.
The Harris-Exelis merger is yet another reflection of the intense consolidation now taking place in the defense industry. Leading U.S.-based contractors such as Lockheed Martin and General Dynamics are slashing costs and merging with other smaller players, as the Pentagon aims to cut spending by $1 trillion over a decade.
What gives Harris a decided edge is a 50/50 split between commercial and military clients, which allows it to weather a slump in any one sector. Roughly half its revenue is derived from the commercial sector, with the other half from government agencies including the Federal Aviation Administration and the Pentagon. This dichotomy helped the company survive the brutal slowdown in commercial aviation, which has finally eased.
Meanwhile, the military electronics market will be fueled over the next decade by expanding airlift operations worldwide and the corresponding need for new communication, navigation and surveillance equipment that allows military aircraft to share airspace with commercial aircraft. These are the very technologies in which Harris excels.
Harris' products include combat radios, fighter-jet cockpit communications and command-control systems for military planners.
The secular trend for greater military aerospace spending is global. According to the Teal Group, aerospace consultants based in Fairfax, Va., the world's air forces are at various combat aircraft replacement and upgrade cycles, which is good news for the avionics and electronics market.
At the same time, most NATO countries are in an active replacement phase for their 1970s-designed aircraft, while emerging nations such as India will evaluate entirely new aircraft sources in the near future.
More than 5,000 combat aircraft will enter service globally over the next decade. These aircraft require sophisticated avionics and electronics, which is Harris' area of expertise and a market in which it enjoys repeat clients.
Despite these long-term advantages, the company's stock now trades at trailing-12-month price-to-earnings ratio of about 25, roughly in line with the P/E of its peers in the communications sector.
The stock has a dividend yield of 2.53%, compared with the average dividend yield right now of 2.02% for the S&P 500.
At the end of the fourth quarter of fiscal 2015, Harris reported cash on the books of $481 million, available to buy back shares or pay dividends to shareholders.
Indeed, the company's board recently announced a 6.4% hike in its quarterly cash dividend, raising the payout by 3 cents to 50 cents per share. Harris has been paying uninterrupted dividends for the last 32 years; this latest dividend hike is the sixth annual increase initiated by the company.
If you're looking for other stocks that pay high and reliable dividends, year after year, click here for a list of dividend stars that are good buys now.