There’s a lot to like about BAE Systems (LSE: BA). And the recent share price dip may be a decent buying opportunity for patient investors with a long-term focus.
One of the main attractions is the security and defence company’s impressive dividend record. The directors have raised the payment every year since at least 2017. And the compound annual growth rate of the shareholder payment is running at almost 4.4%.
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Dividend rises ahead
City analysts see further increases ahead. And they’ve forecast uplifts of more than 7% for 2023 and again in 2024.
Meanwhile, with share price in the ballpark of 952p, the forward-looking yield is almost 3.3% for 2024. And that strikes me as an attractive level given the growth shown in the dividend record.
However, the stock has dropped back by around 8% over the past couple of months. And that’s despite ongoing positive news flowing from the company.
But such movements are natural after a long move up. And over the past year BAE Systems is around 26% higher even after the pullback.
The company is trading well and expects earnings to increase by more than 23% this year and by almost 10% in 2024.
In May, chief executive Charles Woodburn flagged up strong progress with order flow, new programmes, renewals and the opportunity pipeline. And one example is the US, UK and Australia’s new strategic partnership, known as AUKUS.
Woodburn described it as “significant” in the medium and long term. And the directors think the company is well-positioned to benefit from the “far reaching” programme.
But other drivers in the sector include the Global Combat Air Programme (GCAP) announcement in December with Japan and Italy. And on top of that, the UK and US governments have both recently announced increases in defence spending along with many other countries.
Indeed, the current elevated global threat environment has increased demand for the company’s mission-critical weaponry and defence products. And Woodburn reckons there’s high visibility for growth in revenue, margins and cash flow in the coming years.
Investing for expansion
Meanwhile, the company has been investing to help it cope with expansion. And that means ploughing money back into people, facilities and technologies. But as well as self-funding, the business has been pursuing joint funding opportunities with its customers. And it’s also been developing partnerships and collaborations.
The trading environment looks supportive for the sector and the business. However, it’s possible that national defence budgets may reduce in the years ahead. And if that happens, it seems likely that BAE Systems will see its earnings come under pressure.
In that sense, the company is exposed to some long-term cyclical influences. And that situation adds some risks for shareholders.
Nevertheless, I see the current valuation as fair and the dividend yield as attractive. And for me, the company is well worth further research time now with a view to establishing a long-term position in the shares.
