Investment Insider: Time is now right to plan an attack on defence firms

In times of austerity nothing is sacred. Not even defence budgets. In the US, the Obama administration plans to axe troops and in the UK the Ministry of Defence has to lay off 54,000 service people to cut expenditure by around £4bn.

There are no fewer than 11 listed defence companies on the London stock market. BAE Systems makes planes, ships and guided missiles. It is by far the biggest defence contractor in the UK with a market value of some £10bn. The bulk of its sales go to the governments of Australia, India, Saudi Arabia, the UK and the US, with the latter three accounting for almost 80 per cent of sales.

BAE shares have fallen from 507p in 2007 to around 310p. Nevertheless, it has increased its dividend every year for the past five years. The payout this year is expected to be about 19.5p, which implies an above-market yield of 6.5 per cent.

You wouldn't normally associate Rolls-Royce with the arms industry but defence accounts for a fifth of total turnover. However, it expects a significant proportion of this year's profits to come from its civil aviation and energy divisions. Consequently, unlike some other companies in the defence sector, its shares have been resilient, hovering at a five-year high of around 875p, which values the firm at about 14 times profit.

Cobham has never been, at least until now, a cheap share. In 2009, its shares were valued at over 20 times earnings when profits doubled to £250m. However, profits at the maker of sophisticated aerospace avionics systems are now expected to stay flat. That said, the shares, valued at below 10 times profit, look more attractive. The 4.7 per cent yield is quite tempting.

Chemring has been hammered by setbacks. but with a new man at the helm this may be a good time to revisit the shares that trade at just five times earnings and yield 5 per cent.

Defence spending is unlikely to stay depressed. So now may be a good time to plan your attack on defence companies.

David Kuo is director of financial advice website http://fool.co.uk

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