Harris Corp (NYSE:HRS) announced a 12% pay raise for shareholders Thursday increasing their payout again this year to 0.47 from 0.42 per share. HRS is a communications and technology company based in Florida that drives a key portion of their sales to government and defense agencies.
Today we consider whether HRS meets our dividend investor criteria of attractively valued, high yielding stocks that provide stability for capital preservation oriented investors.
First let's look at where HRS valuation is relative to the overall market. HRS has a market capitalization of $7.5 Billion and enterprise value of $8.6 Billion. On an enterprise basis HRS trades at a mere 7.9 times trailing EBITDA. On a forward earnings basis HRS trades at 14.0 times earnings which is modestly below the S&P 500 average of 15.0. These two measures indicate HRS may be modestly undervalued relative to the overall market.
HRS reported declining revenue in both its most recent quarter and last fiscal year down 2% year over year. More concerning for capital preservation investors is the decline in orders down 8% for the fiscal year and 24% quarter on quarter.
Harris management guided fiscal year revenues to range of negative 1 to negative 3% with declines expected in RF communications, integrated networking and flat to marginally positive growth in their government segment
Analyst's also have a tepid view of HRS longer term growth with consensus projections at 3.5% annualized over the next five years. Again comparing HRS to the S&P 500, this is a level substantially below the 10.0% rate for the large cap index.
Lastly we look at HRS payout ratio and debt load to determine the dividend's stability and capacity for growth beyond their earnings rate. In this case HRS payout ratio is attractive at 35% and indicates the dividend is stable even with declining earnings. Debt is unlikely to be a significant strain as total debt of $1.64 billion can be managed by HRS's $1.1 Billion EBITDA.
In evaluating HRS we note the dividend, while stable and steadily increasing, is less attractive given the lack of projected earnings growth and risks to their While HRS is modestly discounted to the market - their PEG ratio of 4.0 times indicates better value for growth stocks are available in the dividend income universe.
We recommend dividend investors consider adding HRS to their portfolios should earnings projected earnings growth improve - keeping an eye on their non-government RF communications and integrated networking businesses.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.