I think there’s space in a diversified portfolio for some carefully selected high-growth stocks and deep-value plays. However, when it comes to core holdings, I prize steady businesses above all others.
Typically, these stocks are in sectors that aren’t too dependent on the broad economic cycle. They also tend to have decent, rather than spectacular, earnings growth, and pay a reasonable, rather than extravagant, dividend. Rarely the most expensive in the market and rarely the cheapest, I think of them as ‘Goldilocks’ stocks.
One such stock I rate a great buy right now is FTSE 100 defence giant BAE Systems (LSE: BA).
Happy days
BAE Systems made sales of £18.4bn in 2018, with the US (42%) and UK (21%) being its largest markets. Having seen a record order intake, it ended the year with an order backlog of £48.4bn, giving management “visibility on many of our key programmes through the next decade.”
A trading update last month was encouraging for the key markets of the US, with continuing “positive momentum in funding for military readiness and modernisation,” and the UK where it said “Defence and Security remains a priority for the UK government.”
Arabian nights
Given all the above positives, you may be wondering why BAE’s shares are trading at sub-500p versus a 52-week high of over 675p. Part of the reason is that Germany placed a temporary ban on exports of arms to Saudi Arabia after the murder of dissident journalist Jamal Kashoggi, with potential knock-on effects for BAE. Saudi Arabia accounted for 14% of the UK group’s sales last year.
However, Germany has partially lifted restrictions, under pressure from other European governments, including the UK and France. And BAE said in last month’s trading update it’s “working closely with industry partners and the UK government to continue to fulfil our contractual support arrangements in Saudi Arabia on the key European collaboration programmes.”
Pragmatism
My Foolish colleague Edward Sheldon named BAE as his top stock for June at the start of this month, and I agree with his view that investors’ fears in relation to the Saudi issue may be overblown. Economics tends ultimately to trump moral outrage in these kinds of situation, and I expect pragmatism to prevail.
On this basis, I believe BAE’s depressed share price represents a great opportunity for investors to buy into a ‘Goldilocks’ stock that I rate among the best of this ilk in the FTSE 100.
Strength and reliability
Buyers of the shares today at 493p are paying 11 times forecast current-year earnings of 45p a share. This is significantly cheaper than the historical average for the stock. Meanwhile, a well-covered forecast 23p dividend, gives a prospective starting yield of 4.7%. Again, this compares favourably with its long-term average.
BAE’s dividend history is testament to the strength and reliability of its business. With the exception of 2003 when the board maintained the dividend at the same level as 2002, the company has increased the payout every year since the turn of the century.
It’s a great stock for steady growth and income, in my opinion, and is trading at what I consider a bargain price today.
