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Top 4 Defence Stocks Which Pay Good Dividends

Jun 13, 2023

Top 4 Defence Stocks Which Pay Good Dividends

The Indian defence sector has scaled a new peak in FY23, with the total value of defence production exceeding Rs 1 trillion, marking an impressive 12% year-on-year increase.

This robust performance has been reflected in the stock market too, as defence stocks such as Hindustan Aeronautics (HAL), Bharat Dynamics, among others have rallied sharply up to 160%, compared to a 14% rise in the BSE Sensex over the past year.

The impressive performance of these defence stocks, fueled by a strong order book and a stellar run, has positioned the sector as one of the top picks for investors. What adds further appeal to these stocks is if any of the companies makes consistent dividend payouts.

This not only allows investors to benefit from potential growth but also provides them with a regular income stream.

Without further ado, and after applying the combination of strong growth prospects and consistent dividends, here are the top 4 defence stocks to keep an eye on.

#1 HAL

Leading the list is the most obvious name - Hindustan Aeronautics (HAL).

The company is a dominant supplier of aircraft, helicopters, engines, avionics, and the main provider of maintenance, repair, and overhaul services to the Indian defence forces.

HAL has paid two interim dividends of Rs 20 each for the financial year 2023, taking the total dividend paid to shareholders at Rs 40 per share.

Ever since its listing in 2018, Hindustan Aeronautics has declared nine dividends.

Its five-year average dividend payout and dividend yield stand at 36.9% and 3.4%, respectively, making it the most attractive midcap government enterprise.

HAL's Dividend History (2018-2022)

  Mar-18 Mar-19 Mar-20 Mar-21 Mar-22
Dividend per share (Adj.) * (Rs) 32.2 19.8 33 30 50
Dividend payout ratio (%) 54.1 28.4 38.3 30.9 32.9
Dividend Yield (%) 2.9 2.8 6.2 3 3.4
*Adjusted for bonus issues and stock splits
Data Source: Equitymaster

Over the years, the company has invested heavily in research & development (R&D) to trigger growth.

HAL has seen significant additions to its order book in the past couple of months.

The company has already ramped up its production facilities and set up manufacturing facilities at some divisions.

We've been writing to you about HAL since the early days when the defence production megatrend was taking shape and the government's policies for indigenous defence procurement were being finalised.

HAL has secured the largest proposal approval of the total outlay of Rs 705 bn. The proposal is for the construction of 60 utility helicopters-marine, with an estimated cost of Rs 320 bn.

Further, what makes HAL interesting to track is its exposure to the drone market. The company is currently developing an artificial intelligence (AI)-driven advanced drone for strategic missions in high-altitude areas, including along the frontiers with China.

Going forward, the company plans to increase in capacity. It plans to work on the new generation of transport aircraft, including the Multi-Role Transport Aircraft (MTA).

For more details, see the Hindustan Aeronautics company fact sheet and quarterly results.

#2 Mazagon Dock Shipbuilders

Second on the list is Mazagon Dock Shipbuilders.

The company builds and repairs different vessels, including ships and submarines.

It builds passenger ships, cargo ships, destroyers, warships, water tankers, submarines, fishing trawlers and corvettes for the Indian Navy and Indian Coast Guard.

For the financial year 2023, the company has paid an interim dividend of Rs 9.1 per share or 91% on the face value of Rs 10.

Since its listing in 2020, the company has paid five dividends. The five-year average dividend payout ratio stands at 40.9%.

Mazagon Dock Shipbuilders' Dividend History (2018-2022)

  Mar-18 Mar-19 Mar-20 Mar-21 Mar-22
Dividend per share (Adj.) * (Rs) 12.2 4.9 10.8 7.2 8.7
Dividend payout ratio (%) 62.4 21.3 57.6 32.2 31.3
Dividend Yield (%) - - - 3.4 3.6
*Adjusted for bonus issues and stock splits
Data Source: Equitymaster

The company is the only shipyard in India that can build large warships, such as aircraft carriers and submarines. This gives the company a monopoly in the domestic market for these types of vessels.

Currently, the company is working on to construct six submarines for the Indian Navy worth Rs 230 bn.

Mazagon Dock Shipbuilders is also building four destroyers for the Indian Navy worth Rs 80 bn.

The company's export business is still in its early stages, but still it has already won contracts to build warships for Bangladesh and the Philippines. The company is targeting other countries in the Asia-Pacific region, the Middle East and Africa.

For more details, see the Mazagon Dock Shipbuilding company fact sheet and quarterly results.

#3 Bharat Electronics

Third on the list is Bharat Electronics.

A Navratna defence PSU, Bharat Electronics is the dominant supplier of radar, communication, and electronic warfare equipment to the Indian armed forces.

For the financial year 2023, the company has declared a dividend of Rs 0.6 or 60% on the face value of Rs 1 per share.

The said dividend is subject to the approval of the shareholders at the Annual General Meeting (AGM).

The record date for the same will be announced post the board meeting.

Bharat Electronics has remained a consistent dividend payer over the years. Since 2001, Bharat Electronics has declared 47 dividends.

The five-year average dividend payout ratio stands at 42.2%. The dividend yield over the past five years has averaged 2.5%.

Bharat Electronics' Dividend History (2018-2022)

  Mar-18 Mar-19 Mar-20 Mar-21 Mar-22
Dividend per share (Adj.) * (Rs) 0.7 1.1 0.9 1.3 1.5
Dividend payout ratio (%) 34.6 44.8 38.1 47.1 46.6
Dividend Yield (%) 1.4 3.6 3.8 3.2 2.1
*Adjusted for bonus issues and stock splits
Data Source: Equitymaster

Bharat Electronics is one of the biggest beneficiaries of the government's decision to put defence items under import embargo.

It specializes in the production of advanced electronics for ground and aerospace applications.

Its product portfolio includes radars, missile systems, communication equipment, electronic warfare systems, and avionics.

The company, in March 2023, signed two contracts worth Rs 38 billion (bn) with the Ministry of Defence to supply medium power radar and digital radar warning receivers (RWR) for the Indian Air Force.

Going forward, the company plans to expand its reach in the international market by adding new countries. It also plans to upgrade its manufacturing facilities to meet the growing demand for defence products.

For more details, see the Bharat Electronics company fact sheet and quarterly results.

#4 Cochin Shipyard

Last on the list is Cochin Shipyard.

It is India's first greenfield shipyard that builds and maintains shipping vessels such as tankers, defence ships, passenger ships, and bulk carriers.

The company also diversified into inland, coastal, fishing, cruise, and ferry markets.

The company's board recommended a final dividend of Rs 3 per equity share for FY23. The payout translates to 30% against the face value.

The said dividend is subject to the approval of the shareholders at the Annual General Meeting (AGM). The record date for the same will be announced post the board meeting.

This final dividend is in addition to two interim dividends of Rs 7 each paid in November 2022 and February 2023.

The company has declared a total of 12 dividends since 2018.

The five-year average dividend payout ratio stands at 36.8%. The dividend yield over the past five years has averaged 4.4%.

Cochin Shipyard's Dividend History (2018-2022)

  Mar-18 Mar-19 Mar-20 Mar-21 Mar-22
Dividend per share (Adj.) * (Rs) 12.4 13 16.6 15.5 16.8
Dividend payout ratio (%) 41.2 35.8 34.6 33.5 39.1
Dividend Yield (%) 2.4 3.3 6.3 4.1 5.7
*Adjusted for bonus issues and stock splits
Data Source: Equitymaster

Cochin Shipyard's expertise extends to building technologically advanced naval ships and submarines, contributing significantly to India's maritime defence capabilities.

With defence contracts and partnerships, and a solid financial performance, the company has established itself as a reliable and financially stable defence player.

Recently, the company won an order worth Rs 5.5 bn from Samskip Group, a Dutch logistics company, to construct two zero-emission feeder container vessels.

The vessels will be built at CSL's shipyard in Kochi, Kerala, India, and will be delivered in 2025.

With this order, Cochin Shipyard has won 10 orders, in the last six months, with a total value of over Rs 200 bn.

For more details, see the Cochin Shipyard company fact sheet and quarterly results.

To conclude

The defense sector in India has emerged as an attractive investment opportunity, drawing the attention of investors for a long time.

The government's emphasis on indigenization, as evident through initiatives like Atmanirbhar Bharat and Make in India, has fueled the growth potential of defense stocks. The visionary goals set by Prime Minister Narendra Modi, such as making India the world's largest defense manufacturing base and increasing defense exports, further contribute to the sector's promising outlook.

With India's defense spending ranking among the top five globally, representing a significant portion of the country's GDP, the government's focus on promoting domestic defense equipment manufacturing offers a favorable environment for defense stocks to thrive.

All being said, the stock market is a tricky place. Defence sector stocks, like other sectors, are influenced by economic conditions and market fluctuations.

Therefore, it is crucial for investors to exercise caution and conduct thorough research and analysis before making an investment decision.

If you want to dig deeper, use Equitymaster's stock screener to check high dividend yield stocks and the best dividend stocks to buy.

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

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