BAE Systems (LSE: BA) is a share which really has the bit between its teeth right now. In the past 10 weeks, its share price has risen by more than a fifth as fears over the health of the global economy have driven demand for classic safe-haven investments like defence stocks.
And there’s a swathe of other potential issues, from fierce US trade wars being extended to other trading nations and blocks like the European Union, to major nations entering a period of prolonged recession, that could keep appetite for the armsbuilders well and truly on the boil for the remainder of 2019 and next year.
Arms spending at 30-year highs
But BAE Systems isn’t just a buy for 2020, of course. Potential military conflict over Iran and its nuclear programme might be dominating the airwaves right now, but there’s a number of other geopolitical issues — Russian and Chinese expansionism and the battle against global terrorism — that’s signalling a new dymension in the global arms race.
Don’t just take my word for it. The Stockholm International Peace Research Institute’s latest annual study showed countries across the globe spent a total of $1.8trn in 2018, up 3% year-on-year and the highest level for exactly 30 years. And there’s plenty of evidence showing weapons expenditure should continue to grow.
Earlier this month, US Congress agreed a two-year budget deal that will increase the country’s defence spend to $738bn next year, from $716bn in 2019. Elsewhere, newly-crowned British prime minister Boris Johnson has vowed to increase the arms budget too, and with a particular emphasis on increased shipbuilding. And American lawmakers have again called on European NATO nations such as Germany to bolster what they spend on defence.
No wonder BAE Systems reported a 6% revenues improvement to £8.7bn for January to June, a result which powered operating profit 13% higher to £896m.
Big dividends, top value
Now there’s some uncertainty related to future arms sales to Saudi Arabia. But, as I’ve said before, I don’t expect BAE Systems’s arms sales to this major customer to grind to a halt. Anyway, I would argue that a low forward P/E ratio of 12.1 times reflects the possibility of sales troubles in the Middle East.
Look, thanks to its tight relationships with the US and UK military I fully expect profits at the FTSE 100 firm to continue rising over the long term, irrespective of any cap being placed on Saudi exports. And the brilliant earnings visibility brought about by these alliances is what makes BAE Systems such a great pick for dividend investors, bonds which give it the confidence to keep raising payouts year after year.
City analysts expect more upgrades in 2019 and 2020 too, meaning BAE Systems offers up huge yields of 4.2% and 4.3% for these years. And the payout hikes are unlikely to end there.
Indeed, I reckon the arms giant has what it takes to keep generating brilliant shareholder returns many years into the future, and this makes it great share to buy for any retirement fund.
