US President Trump has always, usually quite loudly and with varying levels of success, promoted US businesses and industry, even to the point of taking a protectionist stance. It is no surprise then, that earlier this month his administration stepped up talks with Tokyo, to pressure Japan into giving a contract to a US firm instead of BAE Systems (LSE: BA).
Jet planes and defence alliances
The move comes as Japan intends to replace its fleet of F-2 fighter jets when they retire in 2035 – production plans for the replacements are set to begin next year. Tokyo has three real options – collaborating with BAE to produce the replacements, collaborating with the US giant Lockheed Martin to replace the fleet, or producing the planes domestically.
Trump has been placing pressure on Japan amid tough talks regarding their military alliance. Earlier this year, Trump said that the US wants a four-fold increase in Japanese contributions to the alliance when the two countries renegotiate their “special measures agreement.” Somehow I doubt this week’s impeachment of the president will have much impact on his negotiating style.
BAE flying high
Despite this kind of political intervention, I really don’t expect BAE to suffer much. Firstly, it remains to be seen whether the political pressure does sway Japan towards the US firm over the British. With Trump up for election next year, I can’t help but feel his warnings and threats may not have the desired weight.
The other reason it doesn’t worry me too much is that this is just one contract of many for BAE. It would certainly be nice to have, but the company has a wide portfolio both in its products and geographically.
I think the recent UK election is a boost for BAE as well. A decisive victory for the Tories – traditionally strong defence spenders – and a crushing defeat for Jeremy Corbyn’s Labour Party (Corbyn is a well-known opponent of Trident) should set BAE in good standing domestically for the next five years.
Likewise a Brexit deal now seems set to pass, and this renewed certainty should help matters for the company (though a stronger pound may make BAE less competitive abroad).
Investment case
BAE’s diversified portfolio is a key element, I think, that should make it a steady investment for many years. The company’s latest earnings numbers showed strong results, and its increased interim dividend was another boon for investors.
As it stands, BAE Systems offers a current dividend yield of just below 4% – not the largest number, but it has been brought about by gains in the share price these past few months rather than a low payout itself. Similarly its forward-looking price-to-earnings ratio is pretty middle-of-the-road at 12.6.
BAE may not be the stock to go for if you are looking for rapid growth, but as a solid blue chip with decent returns and the potential for some steady gains, I think it is certainly an investment well worth considering.
