Just before Rachel Reeves delivered her spring statement yesterday (26 March), the FTSE 100 was at 8,684. That was 2.5% off its record high. Thirty-three minutes later, after she sat down, it was barely unmoved at 8,681. Given there was little new in what the Chancellor said, this isn’t surprising. Having said that, I thought there would have been more of a market reaction to the halving of Britain’s growth forecast for 2025.
But the movement in the overall value of the index hides some individual winners and losers.
During the course of the Chancellor’s speech, Babcock International Group (LSE:BAB) gained the most (0.65%) of all the stocks on the index. And it continued to rise after she had finished speaking.
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Rolls-Royce Holdings, which derives approximately a quarter of its revenue from its defence division, was the next best performer.
In contrast, Severn Trent was the biggest loser, falling 0.76%. I suspect this reflects ongoing problems in the sector as the water industry wasn’t mentioned in the spring statement.
An uncertain world
Given that the government wants to establish the UK as a “defence industrial superpower”, it’s easy to see why Babcock’s share price did well. The government has already committed to increasing military spending to 2.5% of gross domestic product from April 2027. It now plans to spend an additional £2.2bn in the next financial year.
It also wants to streamline the procurement process to make it quicker and more agile. In addition, extra export finance will be made available to help companies in the sector sell more overseas.
A British success story
Since March 2020, Babcock has seen its share price more than double. As a result, it was recently promoted to the FTSE 100.
Encouragingly, the UK government generally likes to ‘spend local’ when it comes to defence, which should help the group continue to expand. Presently, it’s the second largest supplier to the Ministry of Defence. Importantly, it has a very small exposure to the US, which, under Donald Trump’s presidency, is looking to reduce its military spending.
And the stock appears to offer better value than that of its closest peer in the index, BAE Systems. For the year ending 31 March 2025, analysts are forecasting earnings per share for Babcock of 45.5p. This implies a forward price-to-earnings (P/E) ratio of 16.2. The P/E ratio of BAE Systems is 20.9. If the two were valued on the same basis, Babcock’s share price would be 28% higher.
However, I do have some concerns. Babcock incurred £90m of additional costs when building five ships for the Royal Navy. Its dividend is also tiny. Based on amounts paid over the past 12 months, the stock’s presently yielding just 0.7%.
However, for those investors who are comfortable investing in the sector, I think Babcock’s a stock they could consider. The Chancellor’s spring statement has reaffirmed the government’s commitment to the industry, which it believes can help contribute to economic growth.
Of course, successful investing requires taking a long-term view. Hourly movements in share prices should be ignored. But I think this analysis gives an insight into how institutional investors — those with deep enough pockets to move share prices significantly — are assessing the impact of the Chancellor’s announcements.
