Up 151%! Should I buy this FTSE 250 stock that recently returned its dividend?
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If I wanted to invest in world-class British engineering then I don't have too many options these days. But while the country's days as a manufacturing hub may be long gone, these types of companies are still alive and kicking. I FTSE 100 it is home to big names like Rolls-Royce again BAE Systems as well as FTSE 250 and includes several interesting 'British betting' options. One of those is a security company, Babcock (LSE: BAB), that was the best over time.
A place to change
There is no doubt that the defense sector is a growing sector. The German chancellor called for an invasion of Ukraine “point of history”when it comes to how much money countries spend on defense and the man may have a point.
In 2015, only three NATO countries spent 2% of GDP on defense. In 2024, 23 of them spent that money and the abundance went well. Babcock enjoyed a surge in orders from spending, and shares are up 151% from their 2021 lows.
Poland now spends more than any other NATO member and some of that goes to Babcock. It will oversee the construction of three Arrow 140 frigates, to be built in Polish shipyards with local workers.
These are big boats, 140m long and 100 crew. In the coming years, they will generate $3.8bn, a critical sum compared to the 2023 topline of £4.4bn. The design is based on the Royal Navy's Type 31 frigates were made by Babcock and would entice many parties to place orders.
Indonesia has already signed a similar contract and Poland is rumored to want five more frigates.
Supply chains
Those same ships highlight what I believe is perhaps the biggest cause of concern here: supply costs. The Royal Navy ordered five frigates for £250m each. However, inflation and its effects on supply chains meant that Babcock asked for an extra £50-£100m for the entire project.
The MoD was not too happy about this and the process went into dispute resolution. More broadly, this may be a worrying sign that energy and labor costs may affect operations such as the firm's Plymouth base.
With that being said, the company released its full year trading update recently and it appears to be firing on all cylinders. Earnings were a beat, coming in at £311m compared to consensus analyst expectations of £293m.
The order backlog increased by 8%, which means that earnings are likely to increase in the coming years. Greater cash flow has resulted in the resumption of a small annual dividend again after a few years without one. Overall, this looks like a stock to keep an eye on. I'm adding it to my watch list.
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