The growth prospects look good for security businesses.
In the cult 1987 film, RoboCop, as Detroit's police find it impossible to cope with rising crime the city authorities turn to the firm OCP for protection. RoboCop's purpose was "to protect and serve" and the private security business is increasingly assuming that role in today's Detroit following cuts in police force manpower of more than 25%.
During a recession crime invariably rises although our politicians, whilst indulging in the odd bit of theft and fraud as we have recently seen, would have you believe otherwise. More people will commit crimes in order to support their lifestyles and many who would not directly commit crimes will nevertheless indirectly increase the demand for crimes by buying stolen and counterfeit goods.
In Britain, due to disaffection with the police, people are turning towards private security businesses for assistance. This pattern is being repeated around the world.
The Largest Global Security Business
Investors can legally profit from crime by investing in private security businesses, such as the Anglo-Danish international security solutions company G4S (LSE: GFS), formed in 2004 with the merger of Group 4 Falck and Securicor.
G4S is the largest security company in the world with operations in over 110 countries. About 20% of its turnover comes from Britain and Ireland so it provides another way to diversify away from the British economy. However, I'd argue that any further economic troubles will produce more crime which will be good for G4S's businesses. It's an ill wind that blows nobody any good!
G4S most visible presence in Britain is its Securicor vans which move cash around the country. Its other businesses include electronic and physical security systems, operating private prisons, providing airport security, vetting other firms' potential employees, operating secure facilities and minefield clearance.
Profits were 13.3p per share in 2008, an increase of 15.6% on 2007, whilst the 2008 dividend was increased by 30% to 6.43p. The figures for the first half of 2009 showed that half-yearly earnings per share increased by 7% to 6.1p whilst the interim dividend was up by almost 10%.
G4S shares have risen from 200p at the start of the year to their current price of around 250p, putting the shares on a prospective price earnings ratio of about 18 with a dividend yield of 2.8%.
EPS and dividends have steadily increased in recent years; the corresponding figures for 2004 were 9.5p and 1.85p respectively.
The Privatisation Of War
One of the big growth sectors in the security business is military contracting and G4S moved into this business when it bought ArmorGroup in April 2008. Military contracting, particularly for providing transportation services and security for transport and civilian personnel in hostile environments, has experienced a boom in recent times and will continue to grow strongly in the next few decades as the private sector increasingly takes over tasks which were once the exclusive preserve of national armies and the police.
Many countries, with their increasingly creaky military procurement bureaucracies, will find it easier to buy in expertise than to create it themselves. Just look at the UN occupation forces in Iraq; the second largest military force operating under the UN's banner happens to be that provided by private military companies the largest of which are Halliburton's subsidiary KBR and the privately-owned Xe (formerly known as Blackwater).
Future conflicts over resources, most notably water, will continue to create opportunities for private security companies whilst failed and failing states will provide another source of business. The examples of Afghanistan, Pakistan and Somalia show that these states are big exporters of organised crime, piracy and terrorism.
America is experiencing this close to home as drug-related violence spills across its border with Mexico to the point where the Pentagon recently reported that Mexico could even become the next failed state.
To paraphrase Thomas Hobbes' Leviathan, the state of men without civil society is the war of all against all.
In Conclusion
Rising crime rates, terrorism and the destabilisation of parts of the world are topics which most people would prefer not to think about. However, reality doesn't go away just because you want it to do so.
People around the world are increasingly making their own provisions for security and as governments delegate more of their security responsibilities to the private sector, the security business looks set to experience strong growth. G4S is definitely a company to have on your watch list.
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