The war in Ukraine lit a fire underneath defense stocks. Most investors are focused on the Big 5 in the sector, but I think the sixth-largest name -- L3Harris Technologies (LHX) – is most attractive, writes Tony Daltorio, editor at Investors Alley.
Shares in defense companies have surged in recent months, eclipsing the gains seen in the wider stock market averages. An MSCI global benchmark for the sector is up almost 30% in dollar terms since the start of October. That is 15 percentage points more than the broader gauge of worldwide equities.
The gains reflect two things. First, investors are betting on the promises of increased military spending by western governments to help Ukraine’s war effort against Russia. Second, there is a growing conviction among investors that the conflict in Ukraine is unlikely to end quickly. Since the autumn of 2022, there has been a realization that the war would take longer than originally thought, and that Ukraine would require more ammunition.
That brings me to LHX. This company was formed in 2019 via the merger of L3 Technologies and Harris Corporation, with annual revenue of $17.8 billion. It is best known for communications and electronic technologies embedded in weapons systems, such as sensors, as well as for its involvement in the space program.
L3Harris’s three main business segments are: Integrated Mission Systems (39% of sales), Space & Airborne Systems (35% of sales), and Communication Systems (26% of sales). Its largest customers are departments and agencies of the U.S. government and their prime contractors, including Lockheed Martin (LMT) and Boeing (BA).
L3Harris Technologies has come to the fore recently because it is responsible for making the position and navigation unit for the Himars (high mobility artillery rocket system). That is the truck-mounted rocket launcher that has been crucial for the Ukrainian army in its fight against Russia.
Another big reason I like L3Harris Technologies is its recent agreement to acquire Aerojet Rocketdyne, the last independent domestic maker of missile propulsion systems, in a $4.7 billion deal. Aerojet Rocketdyne had $2.2 billion in sales last year.
Lockheed, Raytheon Technologies (RTX), and Boeing — the three main tactical missile contractors for the Department of Defense — rely on Aerojet Rocketdyne for critical components, such as rocket motors. Its acquisition will make L3Harris a more important subcontractor for these companies, as well as for the Pentagon.
L3Harris pays a decent dividend. In February 2022, the company raised its quarterly dividend by 10%, to $1.12 per share ($4.48 annually). Then, on February 24, L3Harris Technologies approved an increase in the company’s per-share quarterly cash dividend rate from $1.12 to $1.14, commencing with the dividend for the first quarter of 2023.
The dividend corresponds to an increase in the annualized rate from $4.48 to $4.56 (yield is 2.2%) and represents the 22nd consecutive annual dividend increase for the company.
Recommended Action: Buy LHX in the $190 to $220 range.