Equities  

Aerospace industry has potential for take-off

Ask most investors where they should be looking for equity income success and few are likely to mention the Paris Air Show. A field filled with spectators and aviation enthusiasts might not seem like a cradle for dividends. But the sceptics would be wrong. The commercial aspects of the show dwarf the ‘planespotter’ elements. This is, after all, a place where new machines are showcased, concepts floated and deals are sealed.

Get it right and there is serious money to be made. A new Airbus A380 costs around £250m. Each plane is the product of numerous companies and this is where British involvement is interesting. The UK might no longer be the workshop of the world but it has adapted and concentrated on those areas where it has a competitive advantage. Technical design prowess, a critical mass of engineering talent and a concentration of component suppliers mean that aerospace and specialist engineering has had an opportunity to flourish.

While manufacturing might only make up 11 per cent of the UK’s gross domestic product, those companies that remain are proving remarkably resilient. To some extent this reflects the Darwinian process at work. A hollowing out of the heavy manufacturing base in the past few decades and increased overseas competition meant only those areas that were profitable and had a competitive edge survived. Shipbuilding and textiles largely left these shores. The car industry looked set for a similar fate but ironically foreign ownership injected a renewal of capital and ideas that has seen UK car production reach 1.46m vehicles in 2012, according to the Society of Motor Manufacturers and Traders, up 9 per cent on a year earlier, while UK car exports have hit an all-time high. In fact, Jaguar Land Rover is complaining of a shortage of engineers as it ramps up production at its Midlands plant.

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So while the UK may have lost control of famous brands and marques to overseas companies, other UK companies have been quietly benefiting from the resurgence of the industry. For them it matters little whether Mini is owned by a British company or a German one (BMW as it happens) so long as the orders for locally-sourced components keep rolling in. GKN, the component supplier is a prime example. It has emerged as a leading supplier of parts to the car and aerospace industry. GKN Driveline business is responsible for many of the axle systems of cars that manage torque and coupling and GKN Land Systems designs and manufactures an array of power train components such as clutches, gearboxes and brakes for agricultural, construction and mining vehicles.

GKN Aerospace has grown rapidly following the integration of Volvo Aero. It produces metallic and composite material components and supplies to key players such as Airbus, Boeing, UTC, GE, Rolls Royce and Snecma, so it matters little which of these giants wins orders as GKN is likely to benefit anyway. The company’s current dividend yield of 2.5 per cent has plenty of room to grow given that the dividend is more than four times covered by earnings and the company has progressively raised the dividend since the financial crisis. Please note yields may vary and are not guaranteed.