An improving business environment
It seems intuitive that in today’s troubled world there will be good business to be had in the area of security and defence. BAE Systems is one firm doing well supplying the world with many of its fighter planes, radar, attack missiles, warships and munitions, and has ambitions to become the world’s leading defence, aerospace and security company.
The firm updated the market today saying that, overall, BAE Systems is operating in an improving business environment and continuing to win new orders, with good prospects for the future. The company’s biggest customers are the US and the UK. In Britain, the firm says, “government budget commitments to defence spending provide greater certainty and stability ahead of the forthcoming 2015 Strategic Defence and Security Review”. In the US, the firm reckons “the recent Congressional budget approval is expected to result in defence spend increasing above the previous Budget Control Act caps”.
BAE Systems has a £37.3 billion order backlog, which it describes as robust, and which goes quite some way to reassure me that the firm’s dividend might be safe for some time to come. At today’s share price of 456p, the forward dividend yield runs at 4.7% for 2016. City analysts following the firm expect forward earnings to cover the payout about 1.8 times. The forward price-to-earnings (P/E) ratio sit at 11.5, which looks undemanding although earnings lack visibility, at least for me, and the industry moves to the whims of government policy makers and budget holders on both sides of the Atlantic.
Good longer-term prospects
Design, engineering and project management consultancy WS Atkins put out a good set of interim results this morning. Compared to a year ago, revenue rose 8.8%, underlying profit lifted by 11.3% and underlying earnings before tax surged by 19%. Sounds good, but I would expect a cyclical firm like Atkins to be doing well at this, arguably, mature stage of the macro-economic cycle. If the cyclicals don’t thrive now, when will they?
That said, the firm is upbeat about its longer-term prospects saying, “as urbanisation increases, infrastructure spending across the globe is predicted to grow significantly in the medium-term and we are well placed to benefit from this investment”.
At today’s 1366p share price, the forward dividend yield runs at 3% for year to March 2017. City analysts following the firm expect forward earnings to cover that payout a healthy-looking 2.6 times and the forward P/E sits at just under 13. The shares have been essentially flat since the beginning of 2014, and there’s a fair chance that situation could continue as the market adjusts the firm’s valuation down to account for cyclicality, just as earnings continue to rise
Norcros supplies the Triton shower brand as well as taps, bathroom accessories, tiles and adhesives. Today’s interims reveal the firm as another cyclical outfit bathing in the sunshine of benign economic conditions. Compared to a year ago revenue is up 9.3%, underlying operating profit rose 34% and underlying profit before tax elevated by 40%. The firm is growing both organically and through acquisitions.
Today’s 192p share price puts the firm on a forward P/E rating of just under eight for year to March 2017 and the forward dividend yield runs at around 3.5%. City analysts expect earnings to cover the payout a decent 3.6 times. The valuation seems reasonable, but I can’t help thinking the best and perhaps easiest investor total returns might already be behind us for Norcros in the current macro-cycle.
I'm most tempted by BAE Systems because of its 'defensive' qualities from this line-up. The cyclicality of WS Atkins and Norcros puts me off their shares. Alongside BAE Systems, I'm keen on five shares that all make good candidates for further research. The Motley Fool analysts identified these London-listed market leaders as enduring long-term investments with strong economic franchises. You can download this wealth-building report now, free from obligation. Click here.
Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.