Straight away, that description alerts me to the possibility there’s a fair bit of cyclicality in the firm’s operations. And indeed, over the past six years, we’ve seen volatile revenue, earnings and cash flow. The operational ups and downs reflect in the tortuous route the share price has taken to deliver shareholders a 45% gain over the period.

Great progress with the dividend

But the dividend has risen consistently. Over six years, we’ve seen a more than 70% increase in the pay-out, which strikes me as impressive. With the share price close to 307p today, the forward-looking dividend yield is around 2.2% for the trading year to March 2020. City analysts also following the firm expect earnings to cover the payment just over 2.7 times, which is a comfortable level of cover.

Meanwhile, the anticipated earnings multiple is flirting with 16 for the current year, which means you won’t find the shares in the bargain bin. But if you account for cash on the balance sheet, the valuation drops to below 14 or so. Given that City analysts don’t expect much growth in earnings next year, QuinetiQ seems to enjoy a full valuation by the stock market and that could be because of some decent-looking quality indicators.

For example, the return-on-capital figure is running near 13% and the operating margin at about 14%. On top of that, the company’s net cash position suggests past trading has been profitable in cash terms.

The company’s vision is to become “the chosen partner around the world for mission-critical solutions.” The current strategy was developed three years ago and in today’s full-year results report, the directors said it’s delivering financial improvements. They reckon the new approach has improved the firm’s ability to win new business and increased the international footprint of operations.

Expanding abroad

The ambition is to generate 50% of revenue from outside the UK. Today’s figures reveal around 30% of revenue came from abroad during the year, primarily from the US, Australia, Europe, the Middle East and others, so there’s some distance to travel before the company realises its geographical revenue goal.

However, things are going well, and the total funded order backlog grew by around 56% during the year to stand close to £3,134m with the rate of order intake increasing by 32% compared to the previous year.

Revenue rose a little above 9% over the trading year with underlying earnings per share lifting a by just over 2%. The directors seem happy enough with that progress and the positive outlook and they pushed up the total dividend by just under 5% to continue with the progressive dividend policy.

I think the dividend growth on offer with QuinetiQ, which is driven by the firm’s strategy, is attractive and I’d be tempted to tuck away some of the shares for the long haul.

The post Why I’d buy shares in this FTSE 250 consistent dividend grower appeared first on The Motley Fool UK.

More reading

• Down 17% to under £5! Here’s why this overlooked FTSE 250 defence gem looks a bargain anywhere below £6.12

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

My first company could be a controversial choice. Engineering group Babcock International Group (LSE: BAB) has come under attack from short sellers recently. The company disputes most of these allegations, but today’s half-year results have left the shares down by 5%, at the time of writing.

Good and bad news

Investors fear that Babcock will turn out to be another outsourcer with loss-making contracts, shrinking profit margins, and too much debt. In my view, today’s figures justify some of these concerns, but certainly not all of them.

The good news was that the group’s underlying results were in line with expectations. Exiting low-margin businesses helped to lift underlying operating profit rose by 1.4% to £279.6m, even though revenue fell by 2.3% to £2.577bn.

A significant improvement in free cash flow provided the cash needed to reduce net debt by £159m, to £1.132bn. This reduced the group’s net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) multiple from 1.9x to 1.6x.

Looking ahead, the group’s combined order book and pipeline expanded by 3% to £32bn, including £650m of new orders from the Ministry of Defence.

Unfortunately, today’s figures also included some bad news. The firm’s contract to decommission Magnox nuclear reactor sites ends next year. Management now expect revenue to fall by about £250m, more than double previous guidance of £100m. The loss of the contract is expected to wipe £20m off the group’s operating profits.

Guidance unchanged

Chief executive Archie Bethel says that the outlook for the 2018/19 financial year is unchanged. He’s expecting single-digit revenue growth and improved profit margins.

Broker forecasts put the shares on a 2018 forecast price/earnings ratio of 6.6, with a dividend yield of 5.2%. If the outlook remains stable, I believe these shares could be an income buy.

A safer option?

If you’re concerned about the outlook for Babcock, one alternative I’d consider is FTSE 250 engineer QinetiQ Group (LSE: QQ). This business is focused on developing its own products and technology, which should give it a stronger competitive edge.

QinetiQ’s business mainly operates in the defence and aerospace sectors. Historically, it’s worked mostly for the UK Ministry of Defence, but this is changing. International customers accounted for 31% of revenue during the first half of the year, up from 26% during the same period last year.

One reason for this changing strategy is that profit margins on UK government contracts are falling. As a result, analysts are forecasting a 10% fall in underlying earnings per share this year, with a modest return to growth in 2019/20.

The group’s half-year results supported this view. Underlying operating profit fell by 11% to £51.1m, despite sales rising 7% to £420.3m.

Falling profit margins aren’t ideal. But I believe the firm should be able to continue winning attractive new work. In the meantime, a net cash balance of £250m means that management has money available to invest in new opportunities.

QinetiQ shares have risen by 15% so far this year. This has left the stock trading on a forward price/earnings ratio of 15.5, with a 2.4% dividend yield. This isn’t cheap, but I think the long-term potential of this business means the price is fair.

The post Have £2,000 to invest? Here are two FTSE 250 dividend stocks I’d buy today appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

That raises the age-old question of whether to go for stocks that are likely to provide capital growth, or those which provide a steady dividend income stream. If you’re still investing and not yet drawing your pension, I really don’t think it makes any difference — your total return is what you get, whichever way.

A growth trust

I’m a big fan of investment trusts for providing retirement wealth, as they’re a way of offering pooled investments where there is no conflict of interest between retail customers and shareholders — because they are one and the same.

Alliance Trust (LSE: ATST) is one I like, especially after a 60% share price rise over the past five years — a period in which the FTSE 100 managed less than 25%. With dividends, the Footsie still handsomely beat a cash ISA, but the Alliance Trust performance is significantly better.

On Monday, it announced the sale of its Alliance Trust Savings (ATS) subsidiary to Interactive Investor for £40m. Its part of the trust’s plans to focus on its global equity portfolio, and, in the words of chairman Lord Smith of Kelvin: “ATS customers, many of whom are Alliance Trust shareholders, will benefit from Interactive Investor’s similar low flat-fee structure, as well as its increased scale and focus.”

Alliance Trust has also been paying progressive dividends, keeping its annual rises ahead of inflation, and that’s something else that I like to see. Although yields are relatively low at around 2%, dividend growth in real-terms can make a significant contribution to your final retirement pot.

Defensive dividends

If you don’t need to spend your dividends right now, you can boost your total retirement capital by reinvesting them in more shares, and I see a tempting dividend prospect in QinetiQ Group (LSE: QQ).

The defence and security specialist has been making some canny acquisitions of late, including the takeover of E.I.S. Aircraft Operations which completed earlier this month. E.I.S. provides airborne training services, and it looks like a good fit for the company to me.

The latest buy, announced Monday, is the acquisition of an 85% stake in Inzpire Group Limited, with an agreement for the remaining 15% after two years.

Inzpire also appears to fit in nicely with QinetiQ’s portfolio of services, with QinetiQ describing the company as “a leading provider of operational training and mission systems for military customers in the UK and internationally.”

Solid returns

The defence business has been in a bit of a squeeze in recent years, but it’s coming out of it, and QinetiQ has been managing to keep its dividend growing well ahead of inflation. In the four years from March 2014 to 2018, the dividend has been lifted by 37%, from 4.6p per share to 6.3p — and forecasts suggest a further 9% over the next two years.

And over the past five years, the share price has put on 38% (even if a bit erratically), providing a tasty overall return — especially for those future pensioners who bought new shares with their dividend cash.

The post 2 growth and dividend stocks I’d pick to help me beat the State Pension appeared first on The Motley Fool UK.

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• Down 17% to under £5! Here’s why this overlooked FTSE 250 defence gem looks a bargain anywhere below £6.12
• Looking for FTSE 100 bargain stocks? Check these out!

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

The good news is that the remainder of this FTSE 100 engineering business is doing quite well. Better than expected, in fact. Chief executive Warren East now expects underlying profit and cash flow for the full year to be “in the upper half of our guidance range”.

This means that shareholders can expect Rolls to report a full-year underlying operating profit of between £400m and £500m this year, compared to previous guidance of £300m-£500m. Free cash flow is also expected to be better than expected, at £450m-£550m.

What’s changed?

Today’s results show that the group’s revenue rose by 12% to £7,487m during the first half of the year. Underlying operating profit rose by £205m to £141m, erasing last year’s H1 loss of £84m.

The biggest contributor to this impressive revenue growth was the Civil Aerospace division. This business produces jet engines for wide-body passenger and cargo aircraft. A 19% increase in engine deliveries and higher spare-part sales helped to lift revenue by 26% to £3,600m during the half year.

Power Systems — which makes large diesel engines for marine and industrial use — also performed well, with sales up 13% to £1,471m. This resulted in a 193% increase in underlying operating profit, which rose to £80m.

I’m still not going to buy

Today’s reported loss of £775m includes one-off costs related to acquisitions, Trent 1000 engine problems and major restructuring. I’m willing to ignore these costs and accept the group’s underlying profit guidance for the full year.

My problem is that this still leaves the shares looking expensive, on around 70 times 2018 forecast earnings. Even if earnings double as expected in 2019, the stock will still have a P/E of 35 and a dividend yield of just 1.4%.

In my view, Rolls-Rocye is already priced for a full recovery. I may be wrong, but I still can’t see enough value here to tempt me to part with my cash.

One engineer I would buy

On the other hand, I am tempted to put some of my investment cash into FTSE 250 engineer QinetiQ Group (LSE: QQ). This business is mainly focused on the defence sector. It provides technical services and research in areas such as battlefield communications and weapons systems.

One of the firm’s historic weaknesses was that it was heavily dependent on UK government contracts. But QinetiQ is building a broader mix of customers and generated 27% of its revenue overseas last year.

Buy, hold or sell?

The company said that first-quarter trading was in line with expectations. Analysts expect the group’s underlying earnings to fall by around 12% to 17p per share this year. Although I wouldn’t normally suggest investing in a business with falling profits, I think the overall picture remains strong for long-term investors.

The company generated an operating margin of 17% last year and ended the period with net cash of £266m — equivalent to about two years’ profits.

Factoring-in this cash gives the stock a cash-adjusted forecast P/E ratio of about 13 and a prospective dividend yield of 2.5%. For investors buying at this level, I think QinetiQ should perform well as part of a long-term portfolio.

The post Why I’d shun the Rolls-Royce share price and buy this FTSE 250 stock instead appeared first on The Motley Fool UK.

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• What on earth’s happening to Babcock, Rolls-Royce and BAE Systems shares?
• The Rolls-Royce share price has been sliding. Could today’s news be a shot in the arm?
• Up 1,000% in 5 years, but the UK government could send Rolls-Royce shares even higher
• £10k invested in the FTSE 100 at the start of the decade is now worth…

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

I see defence contractor QinetiQ (LSE: QQ) as falling into that category, and I see its unloved share price as providing a nice bargain at the moment — even after it’s enjoyed a bit of a recovery so far this year.

There was a modest uptick Wednesday as markets reacted well to a first-quarter trading update, which said: “Underlying trading for the group was as expected during the first quarter, with no change to expectations for group performance in the current financial year.” 

That might not sound exciting, but with Brexit and trade wars making markets feel nervous, and a number of companies downgrading their guidance, an ‘all’s fine’ update really does seem like good news.

Earnings dip

Forecasts suggest EPS will dip by 12% this year, but I’m not too worried about that as the defence business really is focused on the seriously long term. And I also reckon P/E multiples of around 16 are fair value.

But the big thing for me is QinetiQ’s dividend prospects. My colleague Rupert Hargreaves thinks there’s significant upward potential for the annual cash payments, and I agree. The yield for 2018 came in at a modest 3.1%, and the share price recovery since then has dropped forecast yields to only around 2.5%.

But we’re looking at rises ahead of inflation, with payments very well covered by earnings. And unlike a lot of big dividend payers, QinetiQ has no debt – in fact, there was net cash of £267m on the books at 31 March.

Bigger yield

BBA Aviation (LSE: BBA) is another company I rate highly as a long-term dividend stock, and it’s actually offering a bigger dividend yield at the moment with forecast suggesting 3.2% this year and 3.4% next. 

We haven’t seen the same progressive rises as from QinetiQ, and the payment was actually cut slightly in 2016 and held at the same level the following year. But that was in response to an EPS drop of 18% in 2015, the year in which it acquired competitor Landmark, which left that year’s dividend relatively weakly covered.

But after a strong earnings recovery, we’re looking at dividends set to resume their annual rises from this year, with predicted cover back up to around 1.8 times.

Growth ahead?

Fellow Fool write Royston Wild believes that BBA has some significant growth potential ahead of it, including possible future acquisitions, and I reckon that should cement the basis for further steady dividend rises in the coming years.

As a company in pursuit of acquisitions, BBA does carry net debt, which stood at $1,167m at 31 December 2017. But it was down from $1,335m a year previously. That represents a net debt-to-EBITDA ratio of approximately 2.6 times, and I wouldn’t like to see it get much higher than that. But strong free cash flow (of $220.7m in 2017) softens my concerns on that front.

BBA shares have put in a 59% rise over the past five years, but I still see a 2019 P/E valuations of 16.6 as not being too stretching. 

The post 2 FTSE 250 dividend stocks that could help you retire early appeared first on The Motley Fool UK.

More reading

• Down 17% to under £5! Here’s why this overlooked FTSE 250 defence gem looks a bargain anywhere below £6.12

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended BBA Aviation. 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.

Challenging growth 

The first company to appear on the screen is challenger bank OneSavings (LSE: OSB). With a dividend yield of 4% at the time of writing, this upstart meets the first criteria. For fiscal 2017, City analysts are expecting the firm to reward investors with a total dividend of 12.5 p per share, covered 3.9 times by earnings per share, leaving plenty of room for further growth. 

And analysts are expecting the payout to grow substantially for 2018 with an increase of 27% expected. Assuming the firm meets City forecasts for 2018 (EPS up 6.2% to 51.2p) this payout will be covered 3.2 times by EPS, meaning the company will still have plenty of cash left to reinvest in the business while at the same time rewarding shareholders. 

As well as its attractive dividend yield, OneSavings also trades at a highly attractive P/E multiple of only 7.7. According to the bank’s latest trading update, it looks as if it’s on track to report a record performance in 2017 with loan book “growth of c.20% for the full year.“

Cash rich 

The next company that meets my screening criteria is defence contractor QinetiQ (LSE: QQ). 

Like OneSavings, this is yet another unloved dividend stock trading at a depressed multiple with room to grow its payout substantially in the years ahead. At the time of writing the shares trade at a forward P/E of 11.8, although unfortunately, City analysts are expecting group EPS to contract by 2.5% for fiscal 2018. 

Still, while this decline is a disappointment, I don’t believe it warrants such a depressed valuation, especially when the rest of the defence industry is trading at a median P/E of 13. 

As well as the low valuation, QinetiQ supports a dividend yield of 3.3%. Over the past six years, this payout has grown by more than 100%, and City analysts expect it to increase by around 5% per annum for the next two years. There’s plenty of room for further payout growth as well with the distribution covered just under three times by EPS. As additional security, QinetiQ has a cash-rich balance sheet with approximately £200m of net cash at the end of the last reported period. 

REIT Income 

Workspace (LSE: WKP) is the final dividend champion I’m going to profile in this piece. This is a real estate investment trust that manages commercial properties let to fast-growing businesses. This model provides a steady stream of income for the firm and its shareholders although, due to the REIT structure, it has to pay out the majority of its income to shoulders, so dividend cover is less than 1.5.

Nonetheless, rapid earnings growth is supporting payout expansion. For fiscal 2018, City analysts believe the company will distribute 27p per share to investors, up from 17p for 2017 and giving a dividend yield of 2.9%. For 2019, the payout is expected to grow by a further 14%, giving a yield of 3.3%. 

And like the two companies listed above, shares in Workspace are going cheap. They are trading at a price-to-tangible-book ratio of 0.9. The firm’s tangible book value was reported as being 1,026p at the end of the last reporting period.

The post 3 attractive dividend stocks whose yields could double appeared first on The Motley Fool UK.

More reading

• Down 17% to under £5! Here’s why this overlooked FTSE 250 defence gem looks a bargain anywhere below £6.12

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

QinetiQ Energy

The £1.16bn science and engineering company, which is headquartered in Farnborough and operates mainly in defence, security and aerospace, looked set to benefit from resurgent defence spending as May’s final results showed pre-tax profit up 16% to £123.3m. But then it spooked markets in July by warning of a slowdown in orders.

Markets are spooked again today even though it has reported 8% revenue growth to £392.5m, or 3% after adjusting for foreign exchange movements, with profit after tax up almost 30% to £64.1m. The interim dividend was hiked 5% to 2.1p but markets are presumably fretting over some of the negative figures, which include a year-on-year dip in underlying total orders from £376.8m to £276.3m.

Challenging times

Net cash flow from operations also fell from a statutory £60.6m to £35.7m, with the group’s net cash position falling from £271.2m to £194.7m, although management explained that this “reflects increased strategic capital expenditure and working capital movements”.

QinetiQ operates principally in UK, US and Australia and today’s report warns of Ministry of Defence cost savings and the challenging political environment in the US, which could undermine plans to increase defence spending. The backdrop is more positive in Australia, Canada, Saudi Arabia and the UAE. Looking forward, City analysts are forecasting a 7% drop in earnings per share (EPS) in 2018 followed by a flat 2019. With the stock trading at 13.5 times earnings, some of this is in the price. The forecast yield is 2.8%, covered 2.7 times. Today’s knee-jerk response looks overdone. However, you may prefer this high-flying defence contractor instead.

Wealth manager

Asset manager Investec (LSE: INVP) also issued results after a rough patch that has seen its share price drop 17% in the last six months but the market response has been more sanguine, its share price clicking up 2p to 506p. The group’s ongoing operating profit increased 10.5% to £347.5m although just 0.9% on a currency-neutral basis. Recurring income as a percentage of total operating income climbed from 72.4% in 2016 to 76.4%.

The group’s asset management and wealth and investment businesses were boosted, supported by favourable equity markets and combined net inflows of £3.6bn, while its specialist banking businesses enjoyed “good growth in loan portfolios and client activity” despite macro uncertainty. Statutory adjusted earnings per share rose 17.2% to 26.6p, or 5.7% on a currency-neutral basis.

Crashing buy

Management said that Investec’s UK business put in a strong performance, although earnings in South Africa were hit by lower brokerage volumes. The group is now available at a bargain 9.7 times earnings on a forecast yield of 5%, covered twice. However, red hot wealth manager Rathbone Brothers could prove more tempting.

Investec has delivered steady EPS growth for the last five years, and that is forecast to continue at 7% in 2017 and 8% in 2018. By then, the yield is forecast to hit 5.6%. Investec looks well set, although I should add that asset managers can get smashed if stock markets fall. Maybe one to buy in the crash that everybody keeps threatening us with?

The post These 2 bargain stocks could still make you brilliantly rich appeared first on The Motley Fool UK.

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• Should I sell FTSE 100 stocks ahead of May and go away?
• Down 17% to under £5! Here’s why this overlooked FTSE 250 defence gem looks a bargain anywhere below £6.12

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

On the up

Look at QinetiQ (LSE: QQ), whose shares are up 15% over the past 12 months, to 272p. It delivered a third-quarter update on 15 February, which spoke of “encouraging progress in the implementation of its strategy to drive future growth“.

Key strategic progress includes a £1bn amendment to the firm’s long-term partnering agreement (LTPA) with the Ministry of Defence, and QinetiQ’s acquisition of Meggit’s Target System division, both in December. Financially, trading is going as expected, with the LTPA amendment adding around £10m to capital expenditure this year. A £50m share buyback programme is nearing completion.

The gain in the share price has lifted QinetiQ’s forward P/E multiples to around 17 for the next couple of years, which is a bit ahead of the FTSE average. That makes me a little cautious, but it’s probably a fair valuation for a safe investment in these troubled times.

Big loss

Rolls-Royce (LSE: RR) reported a pre-tax loss of £4.6bn this week. That included writedowns for various reasons, but it’s still the company’s biggest ever loss and is up there with some of the most eye-watering that UK companies have ever produced.

At 695p, the shares are down 6% since the results emerged, but I reckon we should be focusing on the company’s transformation plan. After a couple of very tough years, which brought a string of profit warnings to shock the industry, analysts are now predicting a return to earnings growth.

There’s a 16% EPS rise on the cards for 2017, followed by a further 4% the year after. And the dividend, which was slashed in 2015 and cut further for 2016, should start climbing back again.

We are looking at a predicted P/E of 19 and a modest 2% dividend yield for 2018, but if we genuinely are at a pivot point in Rolls-Royce’s recovery, I think that could turn out to be a good valuation to buy at. And with Warren East, the former head of ARM Holdings, at the helm, I’m once again cautiously optimistic.

The best?

My final pick is my favourite in the sector, BAE Systems (LSE: BA). While rivals have been in the headlines (largely for the wrong reasons), BAE has been bringing in steady earnings and paying out solid dividends. Due to the nature of payments for its long-term contracts, earnings can be a little erratic in the short term, and forecasts put EPS at 45.6p by 2018. That’s exactly the same as in 2011, but considering the trading difficulties faced by the sector in recent years years, I think that’s a decent track record.

Dividends have been creeping up, although the share price performance over the fast five years (a 90% rise to 602p) has dropped prospective yields to around the 3.6% level.

BAE’s 2016 results should be with us on 23 February, as the firm expects underlying earnings per share to come in around 5%-10% above last year’s figure. On a forward P/E of 14, BAE looks like top value to me.

The post 3 top FTSE 350 stocks I’d buy today appeared first on The Motley Fool UK.

More reading

• £5,000 invested in Rolls-Royce shares on 17 April is now worth…
• What on earth’s happening to Babcock, Rolls-Royce and BAE Systems shares?
• 93 years of dividend growth! 3 FTSE 100 shares to target income
• The Rolls-Royce share price has been sliding. Could today’s news be a shot in the arm?
• Up 1,000% in 5 years, but the UK government could send Rolls-Royce shares even higher

Alan Oscroft 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.

As part of its plan to streamline the business, Meggitt has sold QinetiQ its Target Systems division for £57.5m in cash. The unit, which provides unmanned aerial, naval and land-based target systems to 40 different countries from bases in Britain and Canada, is expected to make £5.5m in operating profit this year. According to QinetiQ’s management, the deal is projected to increase its earnings in the first year of ownership, and the returns will exceed the cost of capital spent acquiring it within the first three years.

At first glance, it looks as if this deal is good news for QinetiQ and the company’s shareholders. The firm has been able to acquire bolt-on growth at an attractive price of less than 12 times operating profit and the payback period is only three years.  

On the other hand, it looks as if Meggitt has been forced to do this deal at a knock-down price. 

A tough year 

It has been a tough year for Meggitt. Annual profits plunged 60% last August, largely because of a £50.8m hit on its currency hedges, while revenue rose 11% to £883m. However, the biggest surprise in the company’s half-year results was the revelation that its retirement obligations had jumped £100m to £373.6m between December 31 2015 and its half-year end. To help reduce the deficit, the FTSE 250-listed group has agreed to pay £10.2m from the sale proceeds of its targeting division into the company’s pension plan. 

To add to its woes, US activist hedge fund Elliot has taken a 5.2% stake in the business triggering speculation it intends to force a break-up or sale of the beleaguered aerospace engineer. 

City analysts have pencilled-in earnings per share growth for the business of 8% for 2016 and 9% for 2017. Based on these figures, the company is trading at a 2018 P/E of 12.8. 

Bolt-on growth 

Unfortunately, it has also been a tough year for QinetiQ. At the beginning of May, the firm reported a 17% fall in annual pre-tax profit, to £90.2m after one-off charges. Management blamed the earnings slump on “challenging markets” as the Ministry of Defence and other customers demand “more for less.” 

To offset declining profits, management has promised to use the group’s £200m-plus cash pile for bolt-on acquisitions and today’s deal is part of this strategy. 

The City is expecting QinetiQ to report a pre-tax profit of £105m for the year ending 31 March 2017, including contributions from the Meggitt deal, pre-tax profits are likely to come in at around £110m for the year (barring any unforeseen circumstances) up 22% year-on-year. 

Conclusion 

So overall, QinetiQ’s deal with Meggitt is good news for shareholders. It looks as if management has paid an attractive price for the business with a short payoff period and the earnings boost will accelerate QinetiQ’s growth. 

The post What QinetiQ Group plc’s deal with Meggitt plc means for shareholders appeared first on The Motley Fool UK.

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• Down 17% to under £5! Here’s why this overlooked FTSE 250 defence gem looks a bargain anywhere below £6.12

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Meggitt. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.