Why BAE Systems plc Should Be A Candidate For Your 2014 ISA

Over the long term, business at BAE Systems plc (LON: BA) looks solid.

| 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.

So, we’ve been through a tough few years for the aerospace and defence industry, and companies like BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) have been struggling, have they?

And we don’t want to risk wasting our ISA allowance (which will soon rise to £15,000) on them, do we?

Well, take a look at this:

Dec EPS Change P/E Dividend Change Yield Cover
2009 40.1p +8% 9.0 16.0p 4.5% 2.5x
2010 39.8p -1% 8.3 17.5p +9.4% 5.3% 2.3x
2011 45.6p +15% 6.3 18.8p +7.4% 6.6% 2.4x
2012 38.7p -15% 8.7 19.5p +3.7% 5.8% 2.0x
2013 42.0p +8% 10.4 20.1p +3.1% 4.6% 2.1x
2014* 40.5p -4% 10.2 20.6p +2.5% 5.3% 2.0x
2015* 41.6p +3% 9.9 21.0p +1.9% 5.4% 2.0x

* forecast

Sure, earnings have been a little bit erratic, but the dividend hasn’t faltered — in fact, dividend rises have been comfortably beating inflation. The yield, at around 5% and better, is excellent, and it’s been covered just fine by earnings.

BAE did well!

BAe Systems Hawk 102DSome struggle, huh?

Admittedly, the share price took a bit of a hit in February when 2013 revenues came in around £700m below analysts’ expectations, with cuts in US defence spending taking the blame. But at 418p, the share price is still up 6% over the past 12 months, which is a bit ahead of the FTSE 100 — and don’t forget that FTSE-beating 4.6% dividend for the year!

The picture is not so rosy over five years, with only a 20% gain against the FTSE’s 70% — but during a tough period for the industry, that’s really not so bad.

ISA investments are really best suited to the very long term anyway, and over the past 10 years BAE is back on top again — 120% compared to the FTSE’s 50% (and did I mention those superior dividends?)

Long term bet

What about the future? Even if we assume a modest 3% growth per year in the share price (which I think is pretty conservative considering the low forward P/E of only 10), and reinvest an annual 5% dividend over the next 20 years — we’d end up turning every £1,000 put into BAE shares into nearly £4,700!

As long as you’re happy the aerospace and defence business has a good long-term future, BAE has to be worth considering, don’t you think?

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.

Alan does not own any shares in BAE Systems.

More on Investing Articles

Investing Articles

2 mouthwatering FTSE growth stocks I’d buy and hold for 10 years

Growth stocks purchased today could be the gateway to many years of capital growth and returns. Here are two picks…

Read more »

Investing Articles

Can the IAG share price really be as dirt cheap as it looks?

While most shares have recovered since the Covid days, the IAG share price is staying stuck to rock bottom. Surely…

Read more »

Investing Articles

BAE Systems shares are flying! Have I missed the boat?

Sumayya Mansoor looks into whether or not BAE Systems shares are still a good buy for her portfolio after the…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

1 heavyweight FTSE 100 share I’d buy as London retakes its crown

Some Footsie firms are extremely large, but that doesn't mean they couldn't get even bigger. Here's one such FTSE 100…

Read more »

Investing Articles

I’d buy 5,127 National Grid shares to generate £250 of monthly passive income

With a dividend yield of 6.5%, Muhammad Cheema takes a look at how National Grid shares can generate a healthy…

Read more »

Investing Articles

The FTSE 100’s newest member looks like a no-brainer to me!

This Fool explains why she sees the newest member of the FTSE 100 as a great opportunity after its recent…

Read more »

Investing Articles

Empty Stocks and Shares ISA? Here’s how I’d start earning a second income from scratch

Like the thought of earning extra cash tax free? Our writer explains what he'd do to begin earning passive income…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

No savings at 25? I’d start by investing £3k in these 3 red-hot FTSE 100 shares

Harvey Jones thinks these three FTSE 100 stocks would be a great way to kickstart a portfolio of UK shares.…

Read more »