One stock that I particularly like at the moment is the defence specialist and FTSE 100 company BAE Systems (LSE: BA). BAE Systems’ shares have fallen around 25% since February, and this has provided an opportunity in a stock that has not been affected as significantly as businesses in other industries. Whilst BAE stated that it was seeing “more significant disruptions” in the second quarter, it also reported no material impact on business during the first quarter.
BAE Systems shares: backed by governments
A particularly appealing element of the stock is the fact that its revenues are government-backed. Although defence may not be the first priority for governments round the world at the moment, heightened geo-political tensions will certainly still necessitate spending. BAE’s established position in a number of countries (including the US, the UK and Saudi Arabia) will therefore be very useful over the next few years, and should provide BAE with a solid income where other industries are struggling.
BAE has also received new customers in the past few years, including Qatar and Australia. This constant expansion to new areas should provide steady sources of income and help offset any losses caused by a reduction in defence spending by some of the key customers.
The potential for future growth
I can also see future growth for BAE Systems’ shares due to the company branching out to different products. For example, 5% of its products now concern cyber-security and this offers an extra dimension to the company.
BAE has also recently acquired Collins Aerospace’s Military GPS business and Raytheon’s Airborne Tactical Radios business for a combined c.$2.2 billion. Both these acquisitions will add to BAE’s Electronic Systems division and will hopefully harness growth in this area for years to come. This acquisition complements a number of other partnerships with different companies to ensure that BAE Systems is able to deliver innovative approaches to defence.
Balance sheet brilliance
The final reason why I would buy BAE Systems shares is due to a strong balance sheet. Although the recent suspended dividend may cause some concern, it has been done to preserve around £443 million in cash and add a layer of protection to the company. BAE is also likely to pay the deferred final dividend in the second half of 2020 at a yield of nearly 5%. BAE also has sufficient liquidity (£2.6 billion) to deal with the crisis, and has managed to reduce debt over the past few years. Access to £2 billion in revolving credit should also strengthen BAE’s financial position.
For these three reasons, I view BAE as a strong and safe stock that should stay resolute during the crisis. Therefore, I would recommend BAE if you’re looking for a stock with limited risk, but further opportunities for growth and a nice dividend yield as well.
