Nato’s spending splurge has made Babcock hot – a sign fundamental change in dull income defence stocks is happening
I
t’s a miracle. Babcock International, the defence contractor with a specialism in kitting out the UK’s nuclear submarines, has emerged from the depths. After about half a decade in which the story was mostly about cost overruns, acquisition indigestion, accounting woes, pension deficits and too much debt, Babcock is suddenly back in the FTSE 100 index and is a hot stock. The share price has more than doubled this year.
Of course it’s not really a miracle because the performance is easily explained. A fix-the-basics strategy was started in 2020 under ex-Cobham boss David Lockwood and has worked. The last of the badly performing major contracts – to build first-of-a-kind Type 31 frigates for the Royal Navy – is no longer spitting out provisions.
Meanwhile, the group has kept its promises to the City on cashflow et cetera and was able on Wednesday to lift its medium-term target for operating margins by a percentage point to 9%. The pension position is vastly improved, dividends are back and there’s enough cash for a £200m buyback.
