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For the second time in the last six months, Harris Corp. (HRS) has raised its shareholders’ wealth through a dividend hike. Yesterday, the Board of Directors of Harris has increased the quarterly dividend rate by 12% from 33 cents per share to 37 cents.

The new dividend will be payable on September 19, 2012, to shareholders of record as of September 7, 2012. Earlier, in March, the company raised its quarterly dividend rate by 18% from 28 cents per share to 33 cents.

According to management, the company’s growing free cash flow is the primary reason behind two successive dividend hikes. Harris generated $643 million of free cash in fiscal 2012 (ended June 29, 2012) compared with approximately $522 million in fiscal 2011.

Additionally, management already declared that it will use $200 million from the proceeds of Broadcast Communications segment sale-off to repurchase shares within the middle of fiscal 2013 (by the end of CY 2012).

Harris has taken tactical decisions to restructure its business model. In February 2012, the company divested its Cyber Integrated Solutions wing, which provided remote cloud hosting. The company also sold all of its related data center facilities.

Moreover, the company strategically decided to divest its Broadcast Communications businesses, which is consistently underperforming. Harris competes with the likes of General Dynamics Corp. (GD) and Motorola Solutions Inc. (MSI) among others.

Lower spending by the U.S. government for defense, coupled with a slowdown in international defense expenditures have affected Harris. Management already declared that the company will face tight government spending till the first quarter of fiscal 2013. The main reason for this soft outlook is weaker-than-expected demand for the company’s tactical radios from international customers.

The U.S., on the other hand, is expected to reduce its activity in South-East Asia. Furthermore, continuation of global macro-economic headwinds took a toll on Harris’ order bookings.

We believe as near-term growth opportunities become less predictable, management is pursuing a systematic capital return program to make the stock attractive. Year-to-date, the stock provided a handsome return of 30.3% compared with the benchmark S&P 500 return of a mere 12.2%.

We reaffirm our long-term Neutral recommendation on Harris. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock. 

 
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