Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Should You Buy BAE Systems Today?

LONDON -- Shares in BAE Systems  (LSE: BA  ) (NASDAQOTH: BAESY  ) have rocketed over the past five weeks, up more than 20% since mid-February and just below last week's four-year peak above 390 pence.

Although the effect of squeezed budgets in the West has resulted in falling turnover for BAE Systems, I reckon that the company's role as a diversified product builder across the defence spectrum, coupled with its strategy to increase activity in new geographies, should uphold long term growth.

A prestigious brand in new markets
BAE Systems reported last month that group sales dropped 7% to £17.8 billion in 2012, in turn pushing pre-tax profit also 7% lower to £1.7 billion.

The company has faced mounting pressure from falling defence spend in the U.S., by far its largest single customer, and further sales pressure can be expected as crimped budgets weigh and operations in Afghanistan wind down in coming years.

However, BAE Systems remains a key supplier to the U.S., and just yesterday inked a jumbo five-year, £512 million contract with the U.S. military to provide explosives.

As well, the defence specialists are stepping up action in developing geographies, and saw order intake outside of the U.S. and U.K. rise to £11.2 billion last year from £4.8 billion in 2011. And a group-wide order backlog of £42.4 billion, up 8% from the previous year, provides decent earnings visibility.

Attractive dividend income on offer
Income investors love BAE Systems on account of its progressive dividend policy, which has continued to dig out shareholder payout hikes even in times of earnings pressure. City forecasters predict last year's 19.5 pence dividend to rise to 20.4 pence this year before marching on to 20.8 pence in 2014.

Payments this year and next are expected to provide yields of 5.2% and 5.3% correspondingly, some way ahead of the 3.5% FTSE 100 average. And with solid coverage above the widely-held security threshold of 2 times -- cover of 2.1 times is predicted for both of the next two years -- investors can be confident of future payout prospects.

In addition, BAE Systems also announced at March's results a three-year shareholder buyback programme which is expected to return as much as £1 billion to shareholders.

Target value for money
Earnings per share are set to rise 10% in 2013 to 43 pence, according to broker estimates, but are expected to remain flat next year.

Despite the recent share price acceleration, BAE Systems remains cheap in comparison to its aerospace and defence peers -- the company's P/E rating of 9.1 and 9.2 for this year and next stack up favourably to an average forward multiple of 11.7 for the wider sector.

I believe that this provides good value for money given the company's generous dividend policy and long-term growth prospects in new markets.

Bolster your investment income with the Fool
If you already hold shares in BAE Systems, and are looking for more FTSE 100 winners to really jump start your investment income, then you should check out this brand-new and exclusive report covering a multitude of other premium payers right now.

Our "5 Dividend Winners To Retire On" wealth report highlights a selection of tasty stocks with an excellent record of providing juicy shareholder returns. Among our picks are top retail, pharmaceutical and utilities plays which we are convinced should continue to provide red-hot dividends. Click here to download the report -- it's 100% free and comes with no obligation.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2330457, ~/Articles/ArticleHandler.aspx, 10/1/2016 7:00:29 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 21 hours ago Sponsored by:
DOW 18,308.15 164.70 0.91%
S&P 500 2,168.27 17.14 0.80%
NASD 5,312.00 42.85 0.81%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/30/2016 12:06 PM
BA $523.61 Down -0.39 -0.07%
BAE Systems CAPS Rating: No stars
BAESY $27.34 Up +0.28 +1.03%
BAE Systems CAPS Rating: ***