The BAE Systems (LSE: BA.) share price has rocketed by almost 50% since the beginning of 2022. I am considering whether I have left it too late to invest in Europe’s largest defence contractor.
Ethical investing
In an era of socially responsible investing, BAE Systems is not going to appeal to everyone. The company supplies combat vehicles, munitions, and weapons systems to governments throughout the world.
And, it sells a lot of them.
Revenue in 2021 was £19.5bn, generating an operating profit of £2.3bn.
But, if I am prepared to accept the argument, that BAE Systems is helping governments fulfil their primary responsibility of providing security for their people, do I believe the company’s shares are a good long-term investment?
Doomsday
It scares me to say it, but war is a growth market.
Earlier this month, US President Joe Biden suggested that the world is facing the biggest threat of nuclear war since the Cuban Missile Crisis of 1962.
The Doomsday Clock, which is intended to convey the likelihood of a man-made catastrophe, is currently at 100 seconds to midnight, the closest it has ever been. This is not surprising given that there are currently 40 active wars or minor conflicts in the world.
And, according to the Stockholm International Research Institute, military expenditure in 2021 exceeded $2trn for the first time.
This is where BAE Systems stands to gain.
Ukraine
On the day before Russia invaded Ukraine, the company’s share price was 601p. A week later, it was 724p, an increase of 20%. Since then, it has been climbing steadily.
In contrast, the FTSE 100 has fallen by nearly 4% since the war started.
It looks as though the company is starting to see the impact of global instability on its order book.
In the first half of this year, new orders of £18bn were secured, compared to £10.6bn during the first six months of 2021. At 30 June, the total order book stood at £52.7bn — equivalent to nearly three years’ sales.
Government spending
Last year, 43% of the company’s revenue came from the US and 20% from the UK.
The US leads the world in defence spending, and racked up a bill of over $800bn in 2021.
Prior to announcing her departure, Liz Truss promised to increase the UK defence budget to 3% of GDP by 2030. That could be worth an additional £50bn a year. Governments are keen to keep military spending local, meaning BAE Systems is likely to benefit significantly from this uplift.
The defence giant is also set to gain from its exposure to the US, and the strength of the dollar. The company says a 10% increase in the dollar is worth an additional £625m of sales.
What have I decided?
Despite these positive reasons to invest, I think I have left it too late.
Although boasting of 18 years of dividend increases, the yield is currently around 3%, which is below the FTSE 100 average.
The company also has a price-to-earnings ratio of nearly 20, suggesting its shares are not that cheap.
And if, as I hope, the war in Ukraine ends soon, there is likely to be a downturn in the share price.
For these reasons, I am not going to buy, but will keep BAE Systems on my radar.
