Do today’s results make Aggreko plc and Weir Group plc better income stocks than BAE Systems plc?

Should you ditch BAE Systems plc (LON: BA) in favour of Aggreko plc (LON: AGK) and Weir Group plc (LON: WEIR) based on their dividend potential?

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Today’s first quarter trading update from temporary power specialist Aggreko (LSE: AGK) is in line with expectations and shows that the company is making encouraging progress. That’s despite there still being a number of challenges in some of Aggreko’s main markets that contributed to a decline in underlying sales of 14% versus the same period of the prior year.

Reasons for the decline include a 9% fall in rental solutions sales, with weakness in North America being a key contributing factor. Aggreko’s other divisions also saw falling top lines, with power solutions struggling to compete with strong comparatives from the prior year and power solutions utility revenue being hurt by the ending of a contract in Panama.

With Aggreko currently yielding 2.5%, it appears to lack income appeal. Certainly, its dividends may be covered 2.4 times by profit and its bottom line is forecast to rise by 7% next year. But with a price-to-earnings (P/E) ratio of 16.5, it appears to be fully valued.

Bright prospects

Also reporting today was Weir Group (LSE: WEIR), with the pump maker’s shares rising by around 8% following the release of impressive first quarter results. Due to cost reductions and a resilient minerals performance, Weir’s trading has been ahead of expectations, although guidance for the full-year has not been upgraded.

Clearly, Weir is enduring a challenging period as the oil and gas industry adapts to a lower oil price. For example, Weir’s like-for-like (LFL) order input in the first quarter was down by 22% versus the same period of the previous year and while £10m in cost savings and a disposal programme are aiding its financial performance, Weir is still forecast to report a fall in earnings of 28% in the current year.

Although dividends are set to be covered 1.5 times by profit this year, Weir’s shareholder payouts are set to fall marginally in 2017. And with the company yielding 3.4%, it doesn’t appear to be a particularly enticing income play, although with its shares having a price-to-earnings-growth (PEG) ratio of 1.4, their capital gain prospects are relatively bright.

Value for money

In terms of appealing income stocks, BAE (LSE: BA) takes some beating. That’s because its yield of 4.5% is higher than that of the wider index and with dividends being covered 1.8 times by profit, there’s scope for significant increases in shareholder payouts over the medium term. The prospect of this is much greater due to the improving outlook for the global defence sector, with the US economy moving from strength to strength and likely to deliver an increase in defence spending in the coming years.

With BAE trading on a PEG ratio of 1.8, it appears to offer good value for money given its excellent track record and wide economic moat. As such, it seems to be a far more appealing purchase than Weir or Aggreko – especially for income-seeking investors.

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 considered so you should consider taking independent financial advice.

Peter Stephens owns shares of BAE Systems. The Motley Fool UK has recommended Weir. 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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