Dividend Investor Portfolio #4: Defending Income
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Dear Investor,
Welcome to the 4th edition of TipRanks’ Dividend Investor Portfolio & Newsletter.
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Market-Moving News: April 15, 2024
Markets tumbled on Friday to close a rollercoaster of a week on a down note. The end-of-the-week declines were sparked by underwhelming earnings results at the largest U.S. banks, as well as rising geopolitical tensions and ongoing concern over the Federal Reserve’s monetary policy outlook.
This week, investors will continue to closely monitor the incoming economic reports, including retail sales and industrial production, for additional data that could affect the Federal Reserve’s monetary policy. Following recent hotter-than-expected inflation figures, further signs of the economy’s strength would add to growing concerns that the Fed may leave its rates unchanged this year.
Markets will also focus on earnings, with this week’s releases spread between various economic sectors, and as such providing a somewhat better outlook into the season than the results from the large banks.
In addition, the Middle East conflict continues to draw attention, as increased tensions threaten to add to the upward pressure on oil prices. Crude has rallied over 20% this year, with the surge feeding into prices at the pump and overall inflation, putting further strains on consumers.
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This Week’s Quality Dividend Stock Idea
L3Harris Technologies, Inc. (LHX) is an American technology-oriented aerospace and defense company that provides advanced defense and commercial technologies across air, land, sea, space, and cyber domains.
The company traces its roots to Harris Automatic Press Company, incorporated in 1895. Many years and numerous groundbreaking inventions later – including the world’s first pilot training system, microwave scanning radar, electron microscope, spacecraft-tracking antenna, and space avionics technology – Harris Corporation merged with L3 Technologies in 2019. The merger produced L3Harris Technologies, the sixth-largest American defense contractor and one of the most important pillars of NATO defense capabilities. Headquartered in Melbourne, Florida, L3Harris is a Fortune 500 company with a market capitalization of $38.5 billion and an annual revenue of $19.4 billion.
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Well-Diversified Aerospace and Defense Business
L3Harris provides mission-critical solutions for government, civil, and commercial customers worldwide. These solutions include autonomous surface and underwater vehicles and unmanned aircraft systems; multi-domain technological solutions for integrating personnel, intelligence, planning, and other data into battlefield operations; various military systems for electromagnetic spectrum dominance on the ground, at sea, in the air, and in space; innovative integrated solutions for intelligence, surveillance, and reconnaissance (ISR), including Signals Intelligence (SIGINT) systems; and space-based multi-layered solutions for national defense.
The company operates through four reporting segments: Space & Airborne Systems (SAS), Integrated Mission Systems (IMS), Communication Systems (CS), and Aerojet Rocketdyne (AR).
The company’s SAS segment, responsible for ~34% of total revenue, provides space sensors and full-mission solutions, classified intelligence and cyber, mission avionics, electronic warfare systems, and mission network systems for air traffic management operations. The IMS segment, which provides ~30% of revenue, offers a suite of intelligence, surveillance, and reconnaissance (ISR) systems, as well as sensing and targeting, electronic attack, power and communications, networks and sensors, and advanced combat systems for air, land, and sea sectors.
LHX’s CS segment, responsible for ~26% of revenue, provides various communications systems and end-to-end battlefield systems for the U.S. Department of Defense, as well as international, federal, and state agency customers. In 2023, the CS segment was strengthened and broadened following the acquisition of the Tactical Data Links (TDL) product line from ViaSat, Inc. TDL’s Link 16 networks are integrated into military aircraft, vehicles, vessels, and bases, enabling secure voice and data communications.
The remaining revenue arrives from the company’s newest segment, AR, which was initiated in July 2023 with the completion of L3Harris’ $4.7 billion acquisition of Aerojet Rocketdyne Inc., specializing in rocket engines and propulsion systems. The buyout broadened LHX’s capabilities and added to the diversification of the company’s product portfolio.
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23 Years of Dividend Growth
The company (in its pre-merger form of Harris Corporation) began paying dividends in 2001 and has been increasing the payouts each year ever since. The company’s 23rd consecutive increase was announced in February 2024, when the annual dividend was lifted from $4.56 to $4.64. In the past decade, LHX’s dividend has grown at a CAGR of 11% and is expected to follow a similar growth pattern going forward.
L3Harris Technologies’ current dividend yield is 2.2%, higher than the average for the Industrial sector companies and its peers in the Aerospace & Defense industry. Its modest earnings-based payout ratio of 37% and cash payout ratio of 53% leave the company with enough capital to pursue business expansion and reduce leverage while supporting the outlook for further dividend growth. The company’s strategic plan for 2024-2026 targets dividend payout at 35-40% of free cash flows (FCF).
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Shareholder Value in Focus
L3Harris Technologies’ capital deployment priorities clearly state its focus on shareholder returns. The three pillars of L3Harris’ capital strategy are consistent R&D and Capex for business growth, debt paydown, and returning excess cash to shareholders through dividends and share repurchases.
After several strategic acquisitions, including the latest buyout of Aerojet Rocketdyne, the company’s debt load increased accordingly. L3Harris prides itself on prudent financial management; therefore, in recent years it placed an increased emphasis on strengthening its balance sheet by reducing leverage. The company has set a financial goal of reaching total cost savings of $1 billion and paying down its debt in order to increase its financial flexibility.
This flexibility is key to achieving its capital deployment strategy, which envisions 100% of FCF being returned to shareholders through dividends and buybacks after the completion of the deleveraging process. This process seems well underway, with the company’s leverage target expected to be met by 2025.
The company performs buybacks on an opportunistic basis. Despite repurchasing a lower number of shares in 2023 as compared to previous years (due to the focus on paying off its debt), L3Harris reduced the amount of its outstanding shares by about 8%. With the leverage target expected to be reached this year, the company’s shareholders can expect a return to the generous buybacks recorded in the past, as well as a revival of the previous years’ double-digit annual dividend increases.
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Delivering on Targets
The company’s strong delivery on its strategy has been reflected in its income statements. Thus, on January 24, L3Harris reported its Q4 and full-year 2023 results, which featured higher-than-estimated revenues and earnings-per-share. In fact, the company beat analysts’ EPS estimates in all quarters since its 2019 merger, with a single exception in Q3 2022.
In 2023, L3Harris reported revenue growth of 14% from the previous year, led by acquisitions, while organic revenue increased by 6%, primarily from growth in the SAS and CS segments. While EPS decreased by 4% primarily due to higher interest expense from the funding of the acquisitions, the decline was smaller than was expected as higher operating income offset these increased costs.
The company provided guidance for 2024, envisioning organic annual revenue growth of 7-10%, an EPS increase of ~3%, and FCF growth of ~10%. This year, revenue growth is expected to continue to be led by the Communication Systems and Space & Airborne Systems segments, underscoring the success of the company’s latest acquisitions. Analysts expect the company’s earnings-per-share growth to take off starting in 2025, after it completes its cost-reduction and debt-repayment strategy, reaching 10% and above.
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Investing Takeaway
L3Harris Technologies’ stock, as well as the shares of its competitors, has had a volatile year, with strong up-and-down movements registered across the industry. These swings resulted in a 12-month gain of just over 1%. The recent decline of LHX’s stock from this year’s peak in March has led to a decrease in valuations, providing a comfortable entry point. The company currently trades on par with the average for the U.S. Aerospace & Defense industry. Moreover, when compared to its direct competitors, LHX comes in the middle of the valuation range. Furthermore, based on projected cash flows, the company trades about 45% below its fair value, placing it firmly within a value category.
L3Harris holds a strong position in a countercyclical industry and displays an outstanding ability to deliver on decisive targets, including quick debt reduction to free up cash for shareholder compensation. Given the successful progress toward lower leverage ratios, the return to aggressive share buybacks and double-digit dividend hikes is in sight, the company’s forward valuation appears fairly promising. Taking all this into account, we view L3Harris Technologies as well-suited to be a part of long-term income portfolios.
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Dividend Investor Portfolio
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Portfolio News
¤ JP Morgan’s (JPM) reported higher-than-anticipated revenues and earnings, but its weak forecast for the full fiscal year 2024 net interest income spooked investors, sending the stock down almost 8% for the week. We believe that this pullback provides an opportunity to increase positions in the stock of the world’s largest and best-managed bank.
¤ BlackRock (BLK) reported better-than-anticipated first-quarter numbers, outpacing analysts’ revenue and EPS expectations. The world’s largest investment manager’s assets under management rose to a record $10.5 trillion, leading to a strong growth in fee income.
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Recent Trades
None at the moment, although we are considering adding a stock to our portfolio. Stay tuned.
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Portfolio Attributes
| Dividend Portfolio Yield |
Dividend Growth Rate | Annual Dividend Income |
| 3.41% | 8.03% | $3,422.60 |
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Current Portfolio
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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
