The FTSE 250 fell sharply in June as worries about overheating inflation worsened. So today, I’m scouring the index for brilliant bargains to buy.
I think investing in defence stocks could be a good idea right now. China and Russia have been busy building their military capabilities in recent years. And Western nations are likely to keep ramping up their own spending in response.
This is a trend that looks set to continue following Russia’s invasion of Ukraine.
Strong trading
So which UK defence stocks have caught my attention? Well, following recent share price weakness, I’m considering investing in Chemring Group (LSE: CHG).
This particular business manufactures sensors to detect chemical and biological attacks. It also makes countermeasure technology such as flares that military jets release to deflect missiles.
In the six months to April, Chemring’s revenues and underlying pre-tax profits rose 11% and 22% year-on-year respectively. Consequently, the firm elected to raise the dividend 19% to 1.9p per share.
The risks
Supply chain problems represent a danger to profits at defence companies. However, delays to the awarding of contracts are a more traditional danger that can impact near-term profits.
Chemring has endured order delays this financial year due to the budgetary stalemate in Washington at the start of 2022. Business wins expected in the first half have now been pushed into the second half.
The rewards
The unpredictable nature of contract timings isn’t enough to discourage me from buying Chemring, though. I buy stocks with a long-term view and it’s my opinion that defence spending will rise strongly for years to come, driving profits at defence stocks.
Chemring also has a decent record of double-digit annual earnings growth under its belt. And this has reaped big rewards for dividend investors.
Another healthy profits increase last year prompted the firm to hike the full-year dividend 23% year-on-year to 4.8p per share. And City analysts think total rewards will soar to 5.8p this year and to 6.9p next year as profits keep rising. Forecasters reckon earnings will increase 17% and 1% in these years.
A top FTSE 250 dividend stock
It’s worth noting that Chemring’s dividend yields aren’t as big as many other UK shares. They clock in at 1.8% for this year and 2.2% for this year.
However, I think an investor can expect Chemring to make good on these near-term dividend forecasts. This is something that really appeals to me in the current economic environment.
Future dividend levels at many other dividend stocks are more unpredictable as the global economy teeters towards recession and corporate profits forecasts start to look fragile. Chemring’s operations aren’t as sensitive to broader economic conditions as many other companies.
On top of this, projected dividends are covered between 2.9 times and 3.4 times by expected earnings over the next two years. This is well above the safety benchmark of 2 times.
All things considered, I think Chemring is a top dividend stock right now. I’d buy it today and look to hold onto it for years.
