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£5,000 to invest? I’d buy this dividend growth stock today

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In this unsettled world, defence and security solutions are as necessary as ever. If you are looking to invest £5,000, then I consider the defence and security sector a smart move.

Defence specialist Cohort (LSE: CHRT) is a small-cap engineering business with a share price that has skyrocketed in recent years.

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Cohort’s biggest revenue stream comes from defence and security subsidiary companies based in the UK and Portugal, with the majority coming from maritime combat and tactical communication systems.

Subsidiary strength and expertise

Cohort has four subsidiaries, each of which was acquired to bring combined expertise into a collaborative environment. Ensuring the expert guidance and financial stability from above actively encourages each division to thrive. So far, this has proved an excellent business model.

One reason being is that the Cohort directors previously had track records working for the Ministry of Defence (MoD), military or defence contractors. This provides the clout required to open the necessary doors for the subsidiaries, who may not otherwise succeed in winning lucrative contracts.

The four main subsidiaries are: EID, a Portuguese high-tech company specialising in tactical and naval communications; MASS, providing expertise in system engineering, electronic warfare and cyber security to military operations; MCL, a supplier of advanced electronic communications, intelligence, surveillance and reconnaissance; and finally, SEA, a major supplier of sub-sea engineering and software design services to the defence and security markets.

More recently, in December 2018, Cohort gained a fifth acquisition through a majority stake in UK-based Chess Technologies.

Chess provides innovative surveillance and fire control system capabilities to renowned customers such as BAE Systems, Lockheed Martin, the MoD, QinetiQ and Thales.

Increased revenue share

In 2018, EID increased its revenue share by 19%, whilst Cohort increased its ownership of EID to 80%. MASS increased revenue share by 15% and MCL by 18%. SEA let the side down with weaker results and a revenue share drop of 15% but restructuring plans are underway to improve its performance going forward.

Overall Cohort achieved a record profit of £15.6m, a £1.1m increase from 2017.

The dividend has increased steadily over the past few years and currently sits at 5.65p. With a price-to-earnings ratio of 14.92, I think it’s a good time to be building a position in the stock.

One concern for investors was that Cohort reported a 30% reduction in order intake in the year to April 2018. Five orders, including new overseas orders and the renewal of an eight-year £50m MoD contract, have since been secured. 

Product development and exporting

An encouraging aspect of Cohort is through its most recent acquisitions, MCL in 2014, EID in 2017, and Chess in 2018, which are product-focused and export-orientated. This is a clever move because governments, the military and the MoD all face tightening budgets, which is forcing them to cut outside support in areas such as consultancy and training, whilst remaining dependent on the private sector for equipment. Consultancies tend to be more difficult to grow profitably, than companies selling products, especially abroad. Personally, I think this will help secure Cohort’s long-term success.

Cohort will be announcing its final results for the year ended 30 April 2019 on Tuesday 2 July. In my opinion it’s a great stock for steady growth and income.

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Kirsteen owns no shares in any company mentioned. The Motley Fool UK has recommended Cohort. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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