This is such a good time to go shopping for cheap dividend shares that I haven’t paid much attention to FTSE 100 growth stocks lately. So I was surprised to see how well BAE Systems (LSE: BA) has performed.
The defence manufacturer is up 34.52% in the past 12 months. That compares to a drop of 4.13% on the FTSE 100 as a whole over the same period.
BAE also outperformed over five years, growing 29.78%, while the index has fallen 7.95% over the same period. It’s thriving in tough times.
Beating the market
A quick glance at how the company describes itself explains why. “We design, manufacture, upgrade, and support combat vehicles and provide ammunition, precision munitions, artillery systems and missile launchers to a global customer base.”
Defence is arguably the number one defensive sector in our warlike times. Sadly, artillery, missiles and munitions are going to be in demand for some time.
In August, BAE reported an 8.2% increase in half-yearly underlying earnings before interest and tax to £1.11bn, as its customers committed to increased defence spending. It also announced a £1.5bn share buyback.
Its earnings look set to rise even higher as the US, Europe and Asia boost defence spending to address what chief executive Charles Woodburn calls “the elevated threat environment”. JPMorgan Cazenove is now predicting around 10% earnings per share growth a year to 2025 and most likely beyond, with “quite low” risk. That’s impressive, given the harsh headwinds facing so many top UK companies at the moment.
BAE Systems also boasts a fully funded UK pension scheme, solid growth across all five divisions and a £52.7bn order pipeline. Free cash flow is solid and it pays out 50% of profits as dividends.
The FTSE 100 is packed with dividend stocks offering incredible yields, which make BAE Systems’ 3.3% forecast yield look modest by comparison. It’s nicely covered twice by earnings though.
Boom time for BAE
Perhaps the biggest surprise is that this £25bn company trades at a relatively inexpensive 14.8 times forward earnings. There are much cheaper stocks on the FTSE 100, of course. Some are available at five times earnings or less, but few enjoy as many tailwinds as BAE Systems.
As with any stock, there are risks (although unfortunately for the world, peace breaking out any time soon isn’t one of them). Servicing its £3.1bn net debt will get pricier as interest rates rise. Another danger is that markets may decide the BAE Systems share price has flown too high. If inflation falls and central bankers start easing, investors could make a tactical shift to recovery stocks.
I’m already there. While I think BAE Systems is arguably today’s best FTSE 100 growth stock, my current strategy is to buy dividend stocks as they’re available at rock bottom valuations right now. I prefer to buy stocks when they’re down, rather than when they’re up. So I might wait until BAE has fallen out of favour again. I accept that could take some years.
