Most FTSE 100 stocks have been hit in the past year or two by a toxic cocktail of factors. These include spiralling inflation and the rising interest rates used to combat it. Underlying these are fears of the UK slipping firmly into recession.
These big-picture concerns, though, have not significantly affected defence contractor BAE Systems (LSE: BA). Instead, it has been one of the very few companies that have prospered in these uncertain times. And such times, it seems to me, show no sign of becoming less uncertain from the security perspective at least.
Better still is that the share price has fallen 12% from its April high. This means to me, and I already hold the stock, a great company at a knockdown price.
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Wishful thinking or profit-taking?
The share price slide began around the time that news of a Ukraine summer offensive against Russia gathered momentum.
For me, investors appeared to believe that this would mark the beginning of the end of the conflict. Or perhaps they had decided it was as good a time as any to take some profits. After all, in the previous 12 months, the stock had gone up around 15%.
I did not do so partly because I think the conflict in Ukraine is not over. Even if the Russian President were to be replaced, it might well be by someone who continues the war in Ukraine.
In any event, tensions may remain high in Europe, and in Asia-Pacific too, given the China-Taiwan situation.
Huge order book backlog
The situation has been reflected in a slew of new orders in the past year or so for BAE Systems.
On 13 March, it won a key role in the nuclear submarines to be provided to Australia.
On 10 May, Mitsubishi Heavy Industries said it expects record defence orders this year as Japan expands its military. The company is partnering with BAE Systems on a new joint advanced fighter for Japan.
And on 18 May, it was awarded a major three-year contract by the US Army.
In total, the company has an order book worth £48.9bn and a backlog worth £58.9bn, according to its 2022 results. This is up £14.9bn from the £44bn of backlog as of the end of 2021.
Excellent shareholder rewards
Elsewhere in the results, revenue increased 8.9% year on year, exceeding consensus analyst estimates by 1.3%. Earnings per share (EPS) also beat analyst estimates, by 4.7%.
Additionally, it increased annual dividend by 8%, from 25.1p to 27p per share. It also bought back £788m of its shares.
The projections for dividends in 2023 and 2024 are 28.9p and 31.1p per share, respectively.
The main risk for me in these shares is that an easing of global tensions — which we all long for, but which could dent the share price.
However, given the order backlog and dividend estimates above, I cannot think of a better big-picture FTSE 100 stock. A positive as well for me is that government defence departments rarely cancel contracts. They also rarely quibble about rising costs linked to inflation and applied in existing contracts.
I expect the shares to recoup all recent losses and to extend gains, dependent on market conditions. I plan to continue holding the stock in my portfolio for many years to come.
