Company Description: Harris Corporation focuses on communications equipment for voice, data and video applications for commercial and governmental customers.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
HRS is trading at a discount to only 1.) above. Since HRS's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 86.0% premium to its calculated fair value of $27.53. HRS did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
HRS earned two Stars in this section for 1.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. HRS earned a Star for having an acceptable score in at least two of the four Key Metrics measured.
Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2003-2006, 2004-2007, 2005-2008, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1941 and has increased its dividend payments for 12 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
HRS earned a Star in this section for its NPV MMA Diff. of the $14,837. This amount is in excess of the $2,300 target I look for in a stock that has increased dividends as long as HRS has. The stock's current yield of 2.89% exceeds the 2.6% estimated 20-year average MMA rate.
Memberships and Peers: HRS is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: The Boeing Co. (NYSE:BA) with a 2.5% yield, General Dynamics Corporation (NYSE:GD) with a 3.1% yield and Raytheon Company (NYSE:RTN) with a 3.5% yield.
Conclusion: HRS did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks HRS as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $105.77 before HRS's NPV MMA Differential decreased to the $2,300 minimum that I look for in a stock with 12 years of consecutive dividend increases. At that price the stock would yield 1.4%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,300 NPV MMA Differential, the calculated rate is 10.8%. This dividend growth rate is well below the 16.4% used in this analysis, thus providing a significant margin of safety. HRS has a risk rating of 2.25 which classifies it as a Medium risk stock.
HRS has an impressive record of dividend increases. For the last 10 years, the company has averaged nearly a 30% annual dividend increase. The range is from a high of 60% in 2003 to a low of 10% in 2010 (2011 was 13.6%). With 72% of its revenue coming from the U.S. government, future budget cuts are a concern and will likely hamper growth prospects.
To offset this, HRS plans to diversify its business with offerings in new end markets, including energy and health care. The company should benefit from agencies focus on improving their communications systems. HRS is currently trading well in excess of my calculated fair value of $27.53, so for now I will remain on the sidelines.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in HRS (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.