When I think of defence, aerospace and security company BAE Systems (LSE: BA), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company attractive as an investment proposition.
1) Large order backlog
When you’re in the market supplying fighter planes, radar, attack missiles, warships and munitions, as is BAE Systems, demand seems constant. The firm is seeing what it describes as vibrant activity internationally, which manifests as a £42.7 billion order backlog, equivalent to around 2.3 times the firms turnover in 2013.
There always seems to be trouble in some part of the world, which as well as creating immediate demand for weapons and defence systems, also keeps governments focused on deterrent defence capabilities.
Such forward earnings visibility is reassuring and accounts for the firm’s attraction as a dividend favourite.
2) Dividend commitment
BAE Systems has a good record on raising its dividend as it converts revenue into profits:
|
Year to December |
2009 |
2010 |
2011 |
2012 |
2013 |
|---|---|---|---|---|---|
|
Revenue (£m) |
20,374 |
20,980 |
17,770 |
16,620 |
16,864 |
|
Adjusted earnings per share |
40.1p |
39.8p |
45.6p |
38.9p |
42p |
|
Dividend per share |
16p |
17.5p |
18.8p |
19.5p |
20.1p |
Such a long tradition in annual dividend increases will be something that top management is unlikely to want to break. Taking that with the bulging order book, BAE Systems looks like an attractive dividend play in the defence sector, although it seems unlikely that the shares will multi-bag any time soon.
What now?
BAE Systems’ valuation seems reasonable. At a share price of 407p, the forward P/E rating is running at about 10 for 2015 and the dividend is yielding around 5.2%.
