I’m going to top up one of my biggest SIPP holdings — Qinetiq (LSE:QQ) — as the UK defence firm launches a £100m project to push up its share price.
The company has seen extremely strong order book growth in the last 12 months. This has happened with multiple conflicts sadly expanding across the world.
The latest of these involve Iran-backed Houthi rebels targeting commercial vessels along key shipping routes in the Red Sea.
At the same time, the conflict between Russia and Ukraine continues on the borders of Europe.
£100m share price boost
Qinetiq CEO Steve Wadey committed to a £100m share buyback plan in mid-January 2023.
This means the company will buy its shares back from the market. Often, companies remove these shares from the total amount available to buy.
Share buybacks tend to act as a tailwind for increasing a company’s share price. It’s a case of supply and demand. If demand for a company’s shares remains fairly constant, and there is less supply for investors to purchase? That can lead to a mark up in the daily price paid. For Qinetiq, that’s around 330p today.
Today (17 January), £100m will buy around 30.3m Qinetiq shares.
How it helps
Since the start of the year, the Qinetiq share price has seen a tidy 7% rise. But I believe the price can go far higher.
I’ve written previously how the UK heavily subsidises Qinetiq’s R&D.
The business is considered mission-critical, and so more than 95% of its costs are covered by government aerospace support.
It’s also not just conflicts on the ground or at sea where Qinetiq enjoys an advantage.
In October 2023, the company’s US arm signed a $224m deal to develop tactical warfighting support in space. Qinetiq is using its systems engineering expertise to aid the United States Space Force with low-earth orbit missions.
Future growth
Qinetiq comes with a 2.3% dividend yield, which is not outstanding compared to other FTSE 250 growth stocks. However, for me, it’s enough to cover the cost of buying the stock in my SIPP retirement account.
It also trades on a P/E ratio of just 11, much cheaper than the 14.5 average for the FTSE 250.
This company is mid-sized at a £2bn market cap, and so can still produce organic revenue growth. Unlike FTSE 100 giants, it does not need to rely on huge dividend yields to attract new investors.
At this stage in its growth, I’d prefer to see the company using free cash flow on share buybacks.
Dividend aristocrat?
Qinetiq has committed to steadily increasing its dividend payouts to investors over time, too. Dividends jumped 22% between 2018 and 2023. By 2025, the business will pay 8.65p per share.
I see the firm following in the footsteps of FTSE 100 rival BAE Systems. That defence giant is one of the only UK stocks to have increased its dividends for 24 years or more.
So if I play my cards right and keep adding strategically? I could see far higher cash returns from dividends if I hold for the long term.
While Qinetiq is not yet my best SIPP performer, it now has the capability to shine in 2024 and beyond.
