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Top Income Stock: Defense Contractor Harris' Key Buy

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C onsolidation in the defense sector hasn't been all that common in recent years due to uncertainty over military spending, but the Pentagon budget has stabilized, leading some to believe that M&A activity could pick up, especially among midsize defense contractors.

Harris ( HRS ) was happy to oblige in February when it announced plans to buy smaller rivalExelis ( XLS ) for $4.75 billion. Exelis, spun off fromITT ( ITT ) in 2011, specializes in parts for sensors, radar technology, and commercial and military aircraft. Harris forecast pretax cost synergies of $100 million to $120 million. The deal is expected to close in June.

Based in Florida, Harris provides secure communications and encryption systems for government and military use. It's a big player in the space, with a market capitalization of $8.3 billion.

The company serves government and commercial markets in more than 125 countries. It has about 13,000 employees; nearly half are scientists.

Last month, the Defense Information Systems Agency (DISA) awarded Harris a contract with a potential value of $450 million to provide systems engineering and program management services for the agency's Crisis Management System.

The system provides government leaders with video and voice communications. Harris has been supporting the system since 2004.

Harris' earnings and sales growth has been lackluster in recent quarters, but shares surged nearly 10% on Feb. 6 after the company reported better-than-expected earnings and sales, and raised its outlook. It also announced the Exelis buy.

Annual pretax margin and return on equity have stayed healthy. In 2014, pretax margin was 15.9%. Return on equity was 31.9%.

Last month, Harris paid a dividend of 47 cents a share. It has a solid dividend growth rate of 18% and currently yields 2.3%.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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