The legendary growth investor Jim Slater once remarked that “elephants don’t gallop“. By this, he meant that the stock prices of huge companies tend to rise fairly slowly over time compared to more nimble minnows. Clearly, BAE Systems (LSE: BA) shares work with a different playbook.
At the time of writing, the share price is up 25% since the beginning of 2023 and recently hit a record high.
Elephants do gallop!
Not that this growth is surprising. As awful as the Ukraine/Russia conflict has been, it was always going to generate interest from investors in defence firms as governments around the world moved to increase spending budgets in an uncertain geopolitical environment.
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The most recent set of results from the company backs this up. In August, BAE upgraded its guidance for the current financial year. Earnings per share were now expected to grow by 10%-12% compared to the 5%-7% forecast in February.
And those orders just keep coming. In September, a $500m deal was struck to provide Sweden with 48 ARCHER artillery systems. At the beginning of October, it was awarded a £4bn contract as part of the AUKUS programme with Australia and the US to build attack submarines.
Now, I’m always slightly wary of jumping on board when a stock has already done so well. But does the lack of resolution in Eastern Europe, not to mention last week’s awful events in the Middle East, make BAE shares a near-automatic buy?
No sure thing
Well, history shows that momentum is a powerful force when it comes to investing. Indeed, taking a contrarian stance requires being very sure that there are roadblocks ahead that other investors can’t see. Personally, I’m struggling on this front (although this does not mean they don’t exist, of course).
That said, there are a couple of things I’m keeping my eye on.
A price-to-earnings (P/E) ratio of 17 might not seem excessive but it is higher than the five-year average of a little under 15. So, as good as business currently is, one could speculate that at least some of this is already priced in. Accordingly, I suspect that the ‘easy money’ has already been made.
There’s also a worry among analysts that BAE may have overpaid for some recent acquisitions. Shares dipped in August when it agreed to buy Ball Aerospace for roughly $5.55bn, for example.
For me to consider investing in BAE now, there needs to be something else on offer.
Thankfully, this is the case.
Don’t forget those dividends
As I’ve remarked many times before, BAE is an absolute machine when it comes to making passive income for holders. The total dividend has been consistently hiked for many years. Considering the purple patch of trading it’s currently in, I can’t see this trend reversing anytime soon.
That said, I need to be aware that the forecast dividend yield of 2.8% for FY23 is lower than that of the FTSE 100 as a whole (3.8%).
Firm favourite
Seen purely from an investment perspective, BAE shares have been a great stock to own over the last few years. Looking ahead, I think this will continue to be the case, especially for income seekers.
I’d regard this as a solid hold if I were already invested and a (slightly cautious) buy if I weren’t.
