BAE Systems: A FTSE 100 Dividend-Raising Star

In an outcome that's tough on investors, the FTSE 100 (UKX) has failed to deliver a rising dividend payout over the last few years.

Just look at the iShares FTSE 100 ETF  (LSE: ISF  ) , for example. This is an exchange-traded fund that tracks the benchmark index, and we can see the aggregate payment from Britain's top 100 companies has yet to regain its pre-recession peak:

Year

2007

2008

2009

2010

2011

Dividend per share

19.1p

20.2p

17.1p

16.2p

18.1p

But some companies within London's premier index have performed well on dividends, despite these austere times, and this series aims to seek them out. One such name is BAE Systems (LSE: BA  ) .

The big question is can the company's dividend continue to outperform its index. Let's take a closer look.

BAE Systems is one of the world's biggest weapons and aviation groups. With the shares at 339 pence, the market cap is £11,019 million. This table summarizes the firm's recent financial record:

Year

2007

2008

2009

2010

2011

Revenue (£m)

14,309

16,671

20,374

20,980

17,770

Net cash from operations (£m)

(1,240)

(1,095)

1,630

962

482

Adjusted earnings per share

30.1p

37.1p

40.7p

42.4p

45.5p

Dividend per share

12.8p

14.5p

16p

17.5p

18.8p

So, the dividend has increased by 47% during the last five years -- equivalent to a 9.6% compound annual growth rate.

After the company's failed attempt to merge with Franco-German player EADS during 2012, it's business as usual at BAE Systems. Thanks to tightening government budgets that means operating in a difficult trading environment in its largest U.S. and U.K. markets. The firm is a global defense, aerospace and security company employing around 93,500 people worldwide. Its products and services include air, land, and naval forces requirements such as advanced electronics, security, information technology, and support services. The company supplies many of the world's fighter planes, radar, attack missiles, warships, and munitions.

Last year, around 32% of revenue came from its Platforms & Services U.K. division; 28% from the U.S. division and 20% from the International division; 13% from the area of Electronic Systems and 7% from Cyber & Intelligence. Dividend growth has been steady but the defense budgets of national governments have been under pressure recently. I think it's unclear whether BAE's dividend will feel such pressures going forward.

BAE Systems' dividend growth score
I analyze four different features of a company to judge whether its dividend can continue to rise:

  1. Dividend cover: earnings covered last year's dividend around 2.4 times. 4/5
  2. Net cash or debt: at the last count, net gearing was around 33%. 4/5
  3. Cash flow: falls short of earnings and is trending down. 1/5
  4. Outlook and recent trading: satisfactory recent trading; a cautious outlook. 3/5

Overall, I score BAE Systems 12 out of 20, which causes me to believe the firm's dividend may struggle to continue out-pacing dividends from the FTSE 100.

Foolish summary
Positives include modest debt and a dividend well covered earnings. Cash flow seems to struggle to keep up and the outlook statement lacks punch-I'm cautious on BAE Systems' prospects.

Right now, the forecast full-year dividend is 19.96 pence per share, which supports a possible income of around 5.9%. That's pretty fat but will it grow? BAE can stay on my watch list, for now.

BAE Systems is one of several dividend out-performers on the London stock exchange. There's one man who's as keen as I am to find, and invest, in them. I suggest you read all about his best investment ideas now in this free, time-limited report, while you have the chance: "8 Income Plays Held by Britain's Super Investor." This free report analyzes the £20 billion portfolio of legendary high-yield expert Neil Woodford. Click here to discover his favorite dividend opportunities with good growth potential.

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