Was Neil Woodford right to dump his shares in BAE Systems and should I buy some now?

Is it worth collecting the fat dividend from BAE Systems plc (LON: BA) right now?

| 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.

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.

I last looked at aviation and weapons firm BAE Systems (LSE: BA) in July 2016, noting at the time that well-known fund manager Neil Woodford held a tranche of the firm’s shares in his Equity Income Fund. He’d just released a blog post outlining some of the global economic risks he predicted ahead. I wrote that his conclusion seemed to suggest “there are more important influences on the long-term outlook for the UK economy than the process of Britain disentangling itself from the EU.”

However, Woodford dumped BAE Systems shortly after my article was published, so the stock was not destined to be part of his portfolio through the Brexit process after all. My Foolish colleague G A Chester pointed out the reason for the sale was disarmingly simple. Woodford’s head of investment communications, Mitchell Fraser-Jones, had explained the sale by saying: “Our total return expectation for a stock equals its dividend yield plus the anticipated rate of dividend growth.” In the case of BAE Systems, Woodford simply saw better opportunities elsewhere after he’d done the calculation.

A disappointing performance

It seems like a good time to look again at the company now that the Brexit process is so much further advanced than it was. How has an investment in BA Systems faired over the past two and a half years?

The share price was at 544p in the summer of 2016. Today, it’s close to 517p having jumped up to about 675p a couple of times along the way. But holding through means an investment since July 2016 is down by about 27p via the share price. Meanwhile, dividend income came in at just over 52p, so the total return has been around 25p per share, or about 4.6% over the period. That’s not good. And along the way, there’s been a lot of volatility to contend with, so at first glance Woodford’s ‘sell’ decision looks sound.

Looking forward, the anticipated dividend yield for the 2018 trading year is around 4.3%, and the rate of dividend growth is running at about 2.8%. Adding the two together throws up a figure of 7.1. Would that have been enough to keep Woodford interested if he was still invested? He reportedly targets a figure in high single digits, so I reckon it’s probably borderline and not high enough to get him back into the shares.

Lumpy earnings and a volatile share price

In November, the company said in a trading update that it expects earnings to come in broadly flat for 2018 compared to the year before. But the firm has a history of lumpy earnings and wild swings in the share price. I don’t think the firm’s defence-led business is predictable and its fortunes tend to hinge on budget and strategy decisions made by the US and UK governments, and others. Rather than going for BAE Systems, this is one of those occasions where I’d rather iron out single-company risk by investing in a tracker fund, such as one that follows the fortunes of the FTSE 100.

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.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »