Two growth stocks on my radar at the moment are BAE Systems (LSE: BA.) and Diploma (LSE: DPLM).
Now you might be wondering how established businesses with large market capitalisations can also be growth stocks? Well, there’s no rule of thumb as to what constitutes a growth share. For me, it’s more about future earnings and returns potential.
Here’s why I reckon investors should be taking a closer look at these stocks.
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BAE Systems
BAE is one of the world’s largest defence businesses. There are two primary reasons I reckon it is a top option for growth reasons.
To start with, defence spending globally is at all-time highs. I imagine this is in part due to heightened geopolitical tensions in various locations in the past few months. Of course, I must say no one wants to see these conflicts continue, and I’m hoping for a speedy resolution. However, it must be noted that defence spending is much more than just weapons. BAE’s footprint and reputation put it in a prime position to boost earnings and payouts.
This leads me nicely onto my next reason, investor returns. Although a dividend yield of 2.5% may not seem the highest out there, BAE has an excellent track record of paying and increasing dividends. This could continue if performance continues to grow too. However, I’m conscious that dividends are never guaranteed.
Finally, on a price-to-earnings ratio of 17, BAE shares look decent value for money right now considering the size, footprint, track record, and reputation of the firm.
From a risk perspective, resolution of conflicts could result in a performance and return pullback compared to recent stellar years. This is something I’ll keep an eye on but, as mentioned earlier, defence spans way more than weapons spending.
Diploma
Diploma specialises in industrial technical products it provides to a number of sectors. It has grown exponentially through shrewd acquisitions which has helped broaden its footprint as well as grow performance.
Now the big risk with Diploma for me is its current valuation. Trading on a price-to-earnings ratio of 38, the shares are expensive. A poor acquisition or trading downturn could send the shares tumbling. It is worth mentioning the shares have been pricey for some time now, even before it began to soar. Perhaps some of this growth was already priced in.
However, the other side of the coin looks attractive, if you ask me. Since the firm changed CEOs in 2019, it has managed to boost performance marvelously. I think this was perfectly demonstrated by its latest full-year report released last month for the year ended 20 September 2023. The headlines for me were revenue and profit increases, of 19% and 24%, compared to the same period last year. Margin levels, free cash flow, earnings per share, and its dividend all increased too.
Like BAE, Diploma offers a modest dividend yield of 1.7%. However, I can also see this increasing in the future as the business continues its impressive growth trajectory.
To conclude, it seems Diploma’s acquisition-led growth strategy is working very well. I reckon it can continue its good run if past results are anything to go by but I do understand past performance is not a guarantee of the future.
