When attempting to find stocks to play via macro-secular trends, one that may cross you mind is anti-terrorism, sometimes known as counter-terrorism. In the United States, the definition of a terrorist act is loose, but generally encompasses all organized threats against the state—ongoing or perceived—from individuals or a group of individuals. According to a U.S. News and World report, there have been over 300 American deaths from “political violence and mass shootings since 9/11,” and the Heritage Foundation reports that 40 terrorist attacks have been prevented since the 2001 attack on the World Trade Center.
The point is, there’s a clear case to be made that anti-terrorism efforts in the U.S. are here to stay, and thus, investors have a long-term theme to play if they so wish. As part of our coverage of dividend stocks here at Insider Monkey, one approach we’ve been using recently is what we like to call catalyst-dividend investing, or Cat-Div investing for short. The goal of this method is to choose dividend-paying stocks by first looking at an overarching economic premise, and then parse down the ways stock market investors can gain exposure.
In the case of anti-terrorism, which can be classified as a sub-industry of the defense industry, there are some stocks that should pique income investors’ interest, specifically in the electric and biochemical-monitoring arena. Let’s take a look.
Electronic and biochemical monitoring
The electronic surveillance space is filled with large-cap defense companies like Raytheon Company (NYSE:RTN), Lockheed Martin Corporation (NYSE:LMT) and Northrop Grumman Corporation (NYSE:NOC). Raytheon offers monitoring products for warships, jamming equipment, command and control capability to oversee battlefields (including the electromagnetic-equipped SIGINT system), and radar warning receivers. The company pays a dividend yield of 2.8% at a payout ratio of 35%.
Lockheed Martin and Northrop Grumman, meanwhile, pay yields of 3.6% and 2.6% respectively, with payout ratios of 49% and 27%. Lockheed offers many of the same e-surveillance products as Raytheon in terms of scope, and its “Space Fence” technology will soon allow the U.S. Air Force to monitor outer space.
Northrop Grumman offers several different technologies used for homeland security, including most notably the Mobile Chemical Agent Detector, or MCAD. The MCAD “detects chemical warfare agents and toxic industrial chemicals within a 5 kilometer radius,” according to the company.
CECO Environmental Corp. (NASDAQ:CECE) and STERIS Corp (NYSE:STE) are two smaller companies that focus solely on biochemical monitoring and prevention, with the latter paying a dividend yield near 2% at a payout ratio of 27%. Ceco pays a yield of 1.5% at a payout near 20%.
Making a play
Essentially, the publicly traded companies in this space can be broken down into two groups. The larger players like Lockheed and Northrop offer revenue diversification, generally higher yields and less volatility, while the small-caps Ceco and Steris pay lower dividend yields, are a bit more volatile (not much in terms of beta), and are focused on the biochemical side of the industry.
It’s difficult to choose between both groups, per say, as both offer unique advantages. Steris is a global leader in decontamination and infection prevention, and three quarters of its revenue come from the U.S., according to its September investor presentation. Infection prevention products like sterilizers, skin care and chemical washers are responsible for the majority of its revenue, and it expects long-term revenue growth to be 3% to 6% a year. Wall Street expects Steris to grow its earnings by 11.5% a year over the next half-decade, and shares are fairly valued.
The other smaller player mentioned, Ceco Environmental, is about 20% cheaper from an earnings standpoint in comparison to Steris, and offers more growth. Analysts predict long-term EPS growth to hit 20% a year over the next five years. Ceco offers an array of chemical filtration products and one demand driver cited in a company report is the Department of Energy’s promotion of new technology growth in its biomass and gasification projects.
Of Raytheon, Lockheed and Northrop, meanwhile, the former offers investors the best growth potential. Wall Street expects EPS growth of 7% a year through 2018, and this figure is 6.5% for Lockheed and 1.5% for Northrop. Out of the three, Raytheon is also the only one that trades below a price-to-earnings growth ratio below 2.0, so there’s no overvaluation there.
Final thoughts
In short, there are many ways to play anti-terrorism, one of which is by investing in companies that offer products related to e-monitoring. When looking at the large-caps, Raytheon is the most attractive from a growth and valuation standpoint, and its yield is solid. We’re also bullish on the company’s SIGINT system in particular, which is fairly unique to the industry.
The smaller Ceco and Steris offer good growth potential with decent income, and it’d be wise to consider each for their separate emphases on different aspects of biochemical monitoring. Check out some more anti-terror stocks to watch here.
Disclosure: none
