L3Harris Technologies: One Of My Highest-Conviction Dividend Investments

Core Viewpoint - The article emphasizes L3Harris Technologies (LHX) as a strong long-term investment in the defense sector, highlighting its diversified revenue streams, growth potential, and strategic positioning in critical defense areas like missile propulsion and ISR [8][29][30]. Group 1: Company Overview - L3Harris Technologies generated $19.4 billion in revenue in 2023 with 14.8% operating margins, aiming for $23 billion in revenue by 2026 with at least 16% margins, indicating a 3-year revenue CAGR of 5.8% and an implied free cash flow CAGR of 12% [11][10]. - The company is a critical supplier in the defense supply chain, particularly in missile propulsion, capturing approximately 20% of the total costs of every missile it is involved with [10][12]. - L3Harris is one of only two U.S. companies capable of supplying solid rocket motors, with growth opportunities in space launch propulsion, in-space propulsion, tactical missiles, air defense, and strategic deterrence [12][10]. Group 2: Market Dynamics - The ISR market is projected to grow from $40.2 billion in 2022 to $74 billion by 2032, with a CAGR of over 6%, indicating strong demand growth in this segment [16]. - Government spending on defense is under pressure due to rising interest payments, which exceed the national defense consumption budget, but elevated geopolitical risks are likely to sustain defense spending [6][7]. Group 3: Strategic Initiatives - L3Harris is focusing on innovation and cost reduction, targeting a $1 billion reduction in run-rate costs by 2026 through its LHX NeXt program, and is ahead of schedule in achieving this goal [21][24]. - The company is investing in startups, holding 2-8% ownership in around 40 high-tech companies, which allows it to integrate new technologies into its solutions without acquiring these companies [21][30]. Group 4: Financial Outlook - Analysts project a path to $2.8 billion in free cash flow by 2026, translating to 6.6% of its current market cap, with a cash dividend payout ratio of just 30%, indicating significant room for aggressive dividend growth and buybacks [24][25]. - The company currently yields 2.0%, with a five-year dividend CAGR of 10.5%, and plans to return 100% of excess free cash flow to shareholders once leverage targets are met [23][24]. Group 5: Competitive Positioning - L3Harris's diversified portfolio mitigates risks associated with reliance on specific programs, unlike competitors such as Lockheed Martin, which heavily depend on the F-35 fighter jet [9][31]. - The company’s strategy allows it to win contracts as both a prime contractor and a subcontractor, providing flexibility and resilience against market shifts and new entrants [20][31].