Serco Group (LSE: SRP) was the top gainer in the FTSE 250 index today (15 May). The UK stock spiked as much as 7% in morning trading, bringing the year-to-date return above 20%.
As I type though, the daily gain has pulled back a bit to 5%.
Longer term, Serco stock has been disappointing. It’s down 63% over the past 15 years, despite doubling from a multi-year low in November 2018.
So why the rise?
Serco is a multinational outsourcing company that provides public services across various sectors, including defence, transport, health, justice, and immigration. It has its fingers in a lot of pies.
Today, the company announced that it has bagged three contracts worth over £1bn from the Ministry of Defence to provide maritime services for the Royal Navy. These include delivering port services and helping introduce 24 new navy vessels, as well as various maritime training support services.
After a few up-and-down years, Serco seems to be finding its groove. Other recent defence wins include a 10-year contract to carry out a joint recruitment service for all UK military personnel, and a $247m deal to support soldier readiness and performance within the US Army.
While last year’s revenue was basically flat at £4.8bn, order intake grew 7% to £4.9bn, giving a total order book of £13.3bn. Underlying earnings per share (EPS) increased 9% to 16.7p, while it carried out a £140m share buyback and hiked the dividend by 22%.
Valuation
Meanwhile, the valuation doesn’t look too demanding. The forward price-to-earnings ratio is around 11, which is pretty reasonable.
However, the forecast dividend yield currently stands at a modest 2.6%, so I would be hoping for future share price gains to make this stock worth buying.
On that front, there should be plenty of growth opportunities for Serco over the next few years, especially in defence and immigration. It entered 2025 with the highest level of potential new work in more than a decade, at £11.2bn.
That said, it’s still at the mercy of government contracts. Last year, it lost a long-standing contract to manage Australia’s immigration detention centres. So contract losses are an unavoidable risk here.
Should I buy?
The firm has often garnered negative headlines due to the politically sensitive areas in which it operates. High-profile scandals in the past have included overcharging the UK government for electronic tagging of offenders, and allegations of mistreatment in some immigration detention centres.
The company has worked hard to improve its reputation, and it undoubtedly does a lot of good work in keeping essential public services running.
However, it’s currently at the heart of another highly politicised issue in the UK. That is managing private accommodation for over 30,000 asylum seekers across England.
To facilitate this, Serco is offering private landlords five-year guaranteed rent agreements, even if the property is vacant. While this makes financial sense rather than paying for costly hotel accommodation, which the firm likewise helps manage, it’s also controversial. Some local councils and MPs are resisting, with Serco becoming a bit of a political lightening rod.
Weighing things up, I don’t really want all this baggage in my portfolio, especially when Serco’s profit margins are quite low at around 3%-4%. So it’s a pass from me on this one.
