Should You Buy, Sell Or Hold BAE Systems plc, Imperial Brands PLC & Flybe Group PLC?

Is now the best time to buy Flybe Group PLC (LON:FLYB), BAE Systems plc (LON:BA) and Imperial Brands PLC (LON:IMB)?

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Shares in small-cap airline Flybe Group (LSE: FLYB) had a hard landing this morning, falling by around 9%.

The airline said that results were expected to be in line with market expectations, despite the terrorist attacks in Paris last November. These left passenger numbers flat at 1.8m, despite a 2.4% increase in seat capacity.

Flybe’s load factor — how full each flight is — fell by from 70% to 68% as a result. This isn’t especially good, but Flybe says that summer trading is “on track”, with new capacity selling as planned.

The only clear negative in today’s statement was that the stronger US dollar is expected to increase 2016/17 operating costs by £7m. To put that into context, Flybe’s operating costs are about £620m per year, so this shouldn’t be a huge issue.

I’m tempted to see today’s dip as a buying opportunity. Flybe has made progress with its turnaround plans this year. At 57p, the shares now trade on just 5.2 times 2016/17 forecast earnings per share. Even if these forecasts are trimmed, Flybe still seems quite cheap.

A defensive income

The outlook for defence spending in the UK and USA appears to be improving. Shares in BAE Systems (LSE: BA) have risen by 7% over the last six months. Over the same period, the FTSE has lost 3%, so BAE has been a decent buy.

I suspect this could continue. The firm’s earnings per share are expected to rise by 25% in 2016 and by 6.5% in 2017. This puts BAE stock on a forecast P/E of 12.7, falling to 11.9 next year.

That’s not a demanding valuation, in my opinion. BAE’s dividend is also appealing. At 4.4%, the firm’s forecast yield is higher than the FTSE 100 average of 4%.

Although there are some concerns about BAE’s order pipeline for Typhoon jets and some types of ship, it has a diverse mix of businesses. The group’s exposure to the fast-growing cyber security sector is especially attractive and I see BAE as a solid long-term income buy.

How safe are tobacco dividends?

Another popular income buy is Imperial Brands (LSE: IMB), the new name for Imperial Tobacco.

The firm’s focus on brands is the key to its rising profits. Smokers will pay more for premium cigarette brands. At the same time, greater industry consolidation is pushing down production costs.

Imperial reported an adjusted operating margin of 46% for 2015. Free cash flow generation is very strong and this funds a generous dividend. Imperial is expected to pay a dividend of 155.4p per share in 2016, giving a forecast yield of 4%.

Although this isn’t any higher than the FTSE 100 average, Imperial’s dividend is expected to rise by 10% this year and in 2017. The FTSE payout, weighed down by oil and mining stocks, is unlikely to rise this fast.

My only real concern is that the acquisitions Imperial Brands has made to offset falling sales have been funded with debt. Net debt is now £12bn, or 5.2 times this year’s forecast net profit. This seems high to me. It could eventually threaten the firm’s dividend growth.

Imperial’s shares are also trading at record highs, giving a forecast P/E of 16. For these reasons, I rate them as a hold, rather than a buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of BAE Systems. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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