Should I buy more BAE Systems shares in September?

BAE Systems shares have crushed the FTSE 100 index as the company’s earnings have continued to grow. But is the stock now overvalued?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

British Isles on nautical map

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

The historic chart for BAE Systems (LSE: BA.) shares shows they went nowhere for over 20 years (between late 1998 and early 2022). Yet the FTSE 100 defence stock did reliably pay out dividends during that time.

In February 2022 though, the chart started rising almost vertically following Russia’s shocking invasion of Ukraine. This marked the largest military conflict in Europe since World War II, sparking extensive military support for Ukraine from Western nations.

Should you invest £1,000 in BAE Systems right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BAE Systems made the list?

See the 6 stocks

BAE’s share price is now up 140% in five years, beating the FTSE 100 by around 125% in the process.

But should I should scoop up a few more shares as things stand? Let’s take a look.

Created with Highcharts 11.4.3BAE Systems PriceZoom1M3M6MYTD1Y5Y10YALL27 Aug 201927 Aug 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

Strong growth

In the first six months of 2024, the firm’s sales grew 13% year on year to £13.4bn, while underlying earnings before interest and tax (EBIT) rose 13% to £1.4bn. Underlying earnings per share (EPS) grew 7% to 31.4p.

Alongside this strong operational performance, BAE made progress in a number of key areas.

  • Under the AUKUS security pact between Australia, the UK and US, it was selected to help build Australia’s new fleet of nuclear-powered submarines
  • It signed a £4.6bn contract for the delivery of the first three Hunter Class frigates in Australia
  • The £4.4bn acquisition of US-based Ball Aerospace was completed to form a new Space & Mission Systems business
  • It finished a £1.5bn share buyback programme and started another one worth £1.5bn

Looking ahead, BAE raised its full-year sales guidance to £25.3bn, or growth of 12%-14%, up from its previous estimate of 10%-12%. Underlying EPS is projected to increase by 7%-9% to 63.2p.

Conflicts

One risk here would be an unexpected drop in Western defence spending. BAE’s government customers continue to provide a significant amount of its equipment to Ukraine. So a sudden halt to the war there would likely cause volatility in the share price.

Unfortunately, a ceasefire looks unlikely, with Russia having just launched a massive air strike across Ukraine. Moscow said all ceasefire talks have now “lost relevance“.

Meanwhile, Israel and Iran-backed Hezbollah have exchanged heavy fire in a major escalation. And we may see more sabre-rattling from the US and China during the upcoming US presidential election.

Given all this, it’s no surprise that NATO members have committed to increase their defence spend to 2%+ of gross domestic product (GDP) annually. The UK government is aiming for 2.5% of GDP.

My move

But is all this already priced into the stock today? It’s trading at almost 22 times earnings, which is a premium to its multiple over the last five years.

Created at TradingView

Then again, that’s equal to European peer Thales (22) and far cheaper than US rival Northrop Grumman (33). I don’t think the stock is overvalued considering the earnings growth potential.

The 2.3% dividend yield is lower than previous years. Yet the payout has been growing nicely.

Created at TradingView

I reckon the BAE share price is set for further gains in the years ahead as nations sadly feel the need to bolster their defences. The company’s order backlog stood at a record £74.1bn in June.

I’m not buying more but am going to keep holding my shares. And if I didn’t already own them, I’d invest today and hold for the next few years.


Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ben McPoland has positions in BAE Systems. The Motley Fool UK has recommended BAE Systems. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Tesla building with tesla logo and two teslas in front
Investing Articles

The Tesla share price is up 48% since April, but down 19% this year! What’s going on?

Christopher Ruane considers some possible explanations for a sharp recent rise in the Tesla share price -- and a decline…

Read more »

piggy bank, searching with binoculars
Investing Articles

Here’s what forecasts say about the Aviva share price out to 2027

The Aviva share price has made a strong recovery in the past few years, and City experts predict more years…

Read more »

piggy bank, searching with binoculars
Investing Articles

If the stock market crashes, I will buy this under-the-radar AI stock

Nobody knows when the stock market will nosedive next. But one fantastic growth share is on this writer's buy list,…

Read more »

Close-up image depicting a woman in her 70s taking British bank notes from her colourful leather wallet.
Investing Articles

£20k in an ISA? Here’s how it could be used to target £423 of passive income each month

Earning money from dividends in an ISA is one way to set up passive income streams. Our writer explains how…

Read more »

High flying easyJet women bring daughters to work to inspire next generation of women in STEM
Investing Articles

Will the easyJet share price return to its 2021 highs?

The long-term trajectory of the easyJet share price may have escaped some investors. The stock's really depressed, but can it…

Read more »

ISA Individual Savings Account
Investing Articles

Are these the best value Stocks and Shares ISA buys in the whole FTSE 100?

The stock market might be having a strong year in 2025, but I'm still seeing some great value Stocks and…

Read more »

Investing Articles

Is now the time to buy FTSE 100 shares instead of S&P 500 stocks?

The FTSE 100 has beaten 53% of S&P 500 shares over the last two years. Here's a top share I…

Read more »

Businessman with tablet, waiting at the train station platform
Investing Articles

This FTSE 250 stock hit 5-year highs today! Can it keep soaring?

This FTSE 250 stock's risen almost 40% since last summer. Can it keep up its impressive momentum? Royston Wild thinks…

Read more »