With investors rushing to buy UK defence stocks, one FTSE 250 growth star stands out to me.
I just bought Qinetiq (LSE:QQ) for my SIPP as a long-term compounder.
Qinetiq paid £43m to shareholders in 2022/23. The dividend per share is double what it was a decade ago. But there’s more.
BAE the best?
BAE Systems is one of the biggest stock market gainers from the West’s move to aid Ukraine with military support. It’s Britain’s largest defence company, after all.
It remains the UK’s most-searched for stock in 2023, according to Google Trends.
But with so many investors throwing their cash into BAE shares, I see the £10+ per share price as too high. Now I’d have to pay 17 times annual earnings for BAE.
Instead, my eyes alighted on a company a fraction of the size. QinetiQ is a £1.8bn market-cap defence specialist with £1.6bn in revenue. It has a solid and growing dividend, and humming net profits.
A Common Wealth report cited by The Guardian found Qinetiq pays just 4.5% of its own research and development costs. The rest is shouldered by increasing UK government support for aerospace and defence companies.
That’s led to a chunky 23.2% return on investor capital, reporters wrote.
Breakups are tough
So what are the major risks? A takeover or buyout seems most likely to top that list. Those deals don’t always work out best for the private investor.
In 2019, the UK government waved through the £4bn sale of British aerospace firm Cobham to a private equity giant.
Two years later, AIM-listed TP Group was taken out by Science Group for a song. The US engineering giant Parker-Hannifin Corp snapped up the £1.6bn-a-year revenue Meggitt in 2022.
That cleared out some of the largest UK rivals to Qinetiq. But defence is a global industry with massive players.
Where the upside lies
Qinetiq is a multinational with divisions in the Middle East, Australia, and the US.
Chief executive Steve Wadey said on 12 September that the war in Ukraine led to growing interest in its key technologies. These include using laser energy to target airborne threats.
The Ministry of Defence (MoD) also noted something very interesting last year: “QinetiQ…have built a phase-combined laser with the ability in the future to scale fire-power levels”.
Intellectual property and patents are critical to defence companies’ ability to turn potential into profit.
Qinetiq says its dividends will rise from today’s 7.7p per share to 8.59p by 2025.
The company’s inconsistency in upping these payouts may have dampened enthusiasm in the past. But I see a change in strategy here.
It is one of only three firms invited by the MoD to Porton Down in November last year. There it took part in the UK’s first high powered long-range laser weapons trial.
Defence stocks will be critical to managing the uncertain world ahead. I spy a long-term growth and dividend opportunity here, and that’s why I bought Qinetiq.
