BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) is best known for the manufacture of military hardware, such as aircraft and warships.
However, BAE is no longer a traditional defence contract. Over the past 25 years BAE Systems has been adapting its product offering, making investments technology and beefing up the company’s cybersecurity division.
For current and potential shareholders alike this is great news. Cybersecurity is a booming industry and as the world becomes increasingly dependent upon digital infrastructure, the businesses of protecting data and private information is going to expand rapidly.
Steady transition
BAE has steadily transformed itself over the past two-and-a-half decades. The evolution of BAE Systems has seen the group’s business develop from the supply of equipment, into a service provider. Now, around 50% of BAE’s sales are generated from services, across a wide range of activities and geographies.
Key to the cybercrime side of BAE is the company’s Applied Intelligence division. Here, BAE combines what it calls, ‘intelligence-grade’ security, complex services and solutions integration.
The company’s Applied Intelligence team is active in four areas, cyber security, financial crime, communications intelligence and digital transformation. These terms may seem complex, but put simply, BAE is a one-stop-shop for clients who want to eliminate all cyber security threats.
Opportunities for growth
So far there has been a strong demand for BAE’s services. Indeed, Applied Intelligence saw its order backlog jump 25% during the first half of this year, after a 60% increase during the first half of 2013. Management complimented this growth by proposing the bolt-on acquisition of Signal Innovations Group, Inc, a U.S. based imagery and data analysis company.
Unfortunately, BAE’s wider cyber and intelligence business is shrinking, with overall sales falling 13% during the first half of this year. However, Applied Intelligence remains strong, sales grew 7% during the first half of the year to a total of $276m, and there is still plenty of room for growth.
Safeguarding the dividend
BAE’s transition from a hardware provider, into a services’ provider is safeguarding the company’s future. For example, as defence spending around the world falls, as it has been over the past few years, BAE has been struggling to drive growth. Applied Intelligence should solve this problem as the need for data protection will see increasing demand going forward.
For shareholders this is great news. Rising income from the cyber security side of the business will underline one of BAE’s most attractive qualities, the dividend payout.
At present levels, BAE supports a dividend yield of 4.6% and the payout is covered twice by earnings per share. Further, the payout is set to rise in line with inflation next year, which will see the yield rise to 4.7%.
A yield of 4.7% would sit well within any portfolio and for the time being this payout looks safe but it always pays to build a well-diversified portfolio of reliable dividend paying stocks allowing you to reduce risk and sleep soundly at night.
