I think the BAE Systems (LSE: BA) share price is one of the top five investments in the FTSE 100. Today, I’m going to explain why.
Defensive defence
Ethical considerations aside, the business of selling weapons to countries around the world is an incredibly defensive one. Defence contracts between governments and defence contractors are usually multi-year deals. In many cases, these agreements extend into hundreds of millions, or billions, of pounds.
What’s more, because the defence industry is highly regulated and controlled, a handful of companies effectively control the market. BAE Systems, for example, is one of the world’s largest weapons producers. It is by far the largest in the UK and one of the top five weapons producers in the world. Its sales are twice as big as those of its closest European peer, Airbus Group (although weapons sales account for less than a fifth of Airbus’s total sales).
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BAE’s size gives it a substantial competitive advantage, in my opinion. It has more money to invest in new technologies. It can also produce equipment at a lower cost than many of its peers.
Moreover, the company also has unrivalled experience in specific sectors, such as shipbuilding. Not only has the group won multi-billion-pound contracts to build new vessels for the UK submarine and surface fleets, but in 2018 the organisation won a £20bn contract to build Australia’s fleet of new navy frigates.
Put simply, this is an international giant of a company. Further, it dominates its industry and has tens of billions of pounds in revenues guaranteed for the next few years.
BAE Systems share price risks
Despite the company’s strengths, it does face risks and challenges as well. As noted above, the global defence industry is highly regulated. This means the firm could be blocked out of specific markets or lose its contracts if it doesn’t conform to government specifications.
There are also ethical considerations to take into account. Some investors may not be comfortable owning part of a business that manufactures weapons for countries such as Saudi Arabia. BAE could face sanctions and restrictions for selling to certain countries and individuals.
Another unique challenge the company faces is that the government owns what is known as a Golden share in the business. This prevents the corporation from making any extreme changes to its Articles of Association without the Secretary of State’s permission.
There are certainly significant reasons why some investors might not want to own the BAE Systems share price. However, for the reasons outlined, I think the stock is one of the best businesses in the FTSE 100.
Therefore, I’d buy the company for my portfolio today. The stock’s 5% dividend yield also looks so attractive in the current interest rate environment. However, this is just a guide, and there’s no guarantee the organisation will meet this distribution target.
