BAE Systems Update

There's more value left in BAE Systems.

Well, Valentine's Day has come and gone. I got to my girlfriend's house on the night and she was on fire. What do you do in such a situation? That's right, I rolled her up in a rug and threw a bucket of water over her.

But that's enough of my investment activities, less seriously, there's a bit of company news in the value portfolio. No trades this week but BAE Systems has announced its results for 2009. 

Into the red but dividend up

Basic eps went to a negative 1.9p compared with a positive 49.6p last year, due to various exceptional large costs and write downs though the dividend was up 10% on the year to 16.0p. One of the value features that attracted me to it in the first place, net cash, actually improved quite a lot from £39m to 403m.

Underlying eps for what it's worth, rose from 37.1p in 2008 to 40.7p. Sound good but this figure is management's view of earnings per share after stripping out certain items such as amortisation and impairment charges, non-cash finance items like fluctuating pension fund valuations and other items of a non recurring nature. 

I don't wholly buy this idea myself. It depends on the facts of each case but frequently it is used as a bit of window dressing for headline purposes when the "basic" eps, which is the accounting standard figure I mention above, looks poor as now.

Prospects

Looking ahead, the directorspeak talks of expected growth for 2010. The consensus eps forecast is 42.1p with a dividend of 16.7p. 

At the current price of 359p that gives a forward P/E of 8.5 and yield of 4.6%. Those are attractive measures for a big cap share that is growing, even modestly like BAE. Add in the highly desirable net cash position and this share remains a hold in the portfolio because there's more to come in my opinion before it becomes dumpworthy.

It's not all wonderful, there is a certain amount of trade-off here as with most of the shares in this list. The lacuna with BAE is tangible asset cover. In fact it is astronomically far from that because BAE has no tangible assets at all, rather, it has vast negative tangible book value. I accept that though in return for its big cap status and the other value features above.

Whatever, the market liked the results on publication and BAE is currently up a little on its purchase price of 334.5p in October 2009.

Up 10%

Here's how we look right now on the fully invested portfolio with a profit of just over six gees which is around ten clicks up on the original £60, 000 put into play and that excludes dividends received. My big additional purchase of Aviva last week, which lowered the average cost price of this share quite a bit and skewed the portfolio heavily towards the holding, is now back to break even. It adds risk to go seriously overbalanced in this way, so you have to be exceptionally confident in a share to do so. In Aviva, I am.

Dart and Moneysupermarket have been disappointing so far but extreme patience is required for this game. As far as I'm aware the fundamentals for those two shares have not changed for the worse.

Cable & Wireless published recently the full details of its forthcoming split into two new telecom companies. One interesting point there is that their dividend forecast for the first post split year of 2010/11 in total from the two new companies is equal to the 2009/10 likely figure of 9.5p from the old C&W. Which makes for a fat yield of 6.9% on the current price of 137p. 

The shares haven't gone anywhere much since they entered the portfolio in November 2009 but I maintain my opinion that the split, due to be finalised in March, will in time be beneficial.

More from Stephen Bland:

• The Cash Goes In
• Value Portfolio Sells Anglo Pacific
• Value Series Sells IG Group

Of the shares mentioned, Stephen holds Aviva, BAE Systems and De La Rue.