A common definition for a dividend share is a stock that returns an above-average amount to shareholders each year. For a member of the FTSE 100, this means paying a dividend of 3.06% or more. The equivalent figure for the FTSE 250 is 3.53%. On the FTSE AIM 100 index, it’s 1.94%.
So how do the UK’s defence stocks measure against these numbers? Let’s see.
A Magnificent Seven?
The table below shows the current (12 July) yields of UK defence stocks with market-caps in excess of £50m.
| Stock | Index | Yield (%) |
|---|---|---|
| QinetiQ Group | FTSE 250 | 2.28 |
| BAE Systems | FTSE 100 | 1.79 |
| MS International | FTSE AIM 100 | 1.62 |
| Chemring Group | FTSE 250 | 1.43 |
| Cohort (LSE:CHRT) | FTSE AIM 100 | 1.15 |
| Avon Technologies | FTSE 250 | 1.05 |
| Babcock International Group | FTSE 100 | 0.72 |
As can be seen, none of them are offering a return greater than their respective indices. It appears as though income investors are likely to get a better return elsewhere.
On the other hand…
However, although not everyone likes to invest in the sector, it’s an undeniable fact that we live in an increasingly dangerous world. As a result, governments of all colours across the globe are committed to spending more on their armies, navies, and air forces, which can only help increase the earnings of those in the industry.
This could result in them boosting their dividends but, as we’ve seen, they have a long way to go before they reach the average of their peers. Instead, I think military spending is more likely to increase share prices in the sector.
One of Sir Keir Starmer’s last acts as Prime Minister has been to publish the Defence Investment Plan (DIP). This commits the government to spending more on defence, although it falls short of setting out how the government intends to meet the NATO target of 3.5% of GDP by 2035.
Although this shortfall disappointed military bosses, the DIP signifies a shift of emphasis towards more modern forms of warfare. Out go large ships that could be a sitting target for an enemy and in comes £7.5bn of additional spending on drones, other autonomous systems, and cyber security.
Something to consider
Cohort could be one of the beneficiaries of this new approach. It owns a collection of small specialist defence contractors including MASS, which provides “advanced, highly-secure digital services centred around data”, and CHESS, a supplier of counter-drone technology.
In addition, its portfolio includes Marlborough Communications, the developer of the UK’s first flight and speed controller for drone use.
Possible challenges include its reliance on one customer – the Ministry of Defence accounts for around half of its revenue – and, as an AIM-listed group, it doesn’t have the access to capital that some of its larger rivals enjoy.
But its order book has never been higher and its net cash position means it’s well-placed to expand either through acquisition or new product development. For the year ended 30 April, it reported revenue and operating profit “well ahead” of market expectations.
Okay, its dividend might not be particularly exciting (even though it’s been increasing by 10% during each of the past three years and every year since its IPO in 2006) but I think its growth prospects are.
Investing in the defence sector doesn’t appeal to ethical investors but, in my opinion, those who are more comfortable with the industry could consider taking a position in Cohort.
Should you invest £5,000 in Cohort Plc right now?
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James Beard owns shares in Cohort plc and Babcock International Group plc.
