BAE Systems (LSE:BA.) shares have more than doubled in value since October 2020.
On 24 February 2022 — the day Russia invaded Ukraine — they closed 6% higher. Four trading days later, they were 25% up.
But they’ve fallen back from recent highs. Is now the time to take advantage and buy a stake in the UK’s largest defence company?
Head
When deciding whether to invest I usually take a detailed look at a company’s recent financial performance. My accountant’s head is comfortable with numbers, and I enjoy wading through annual reports trying to identify the most relevant information.
And there’s not much to dislike about the finances of BAE Systems.
Revenue in 2022 was 26% higher than in 2018. Over the same period, profit before tax increased by 63%. This enabled the company to increase its dividend from 22.2p per share to 27p — up nearly 22%.
Its balance sheet is also looking healthy.
Net debt at 31 December 2022 was 26% lower than two years’ earlier. And net assets were £3.7bn higher year on year.
Encouragingly, the strong financial performance appears to be continuing.
The company’s most recent trading update, released in May 2023, revealed that earnings per share for 2023 were expected to be 5%-7% higher than in 2022.
Looking further ahead, its order book is equivalent to 30 months of revenue.
Heart
But in my heart, I feel a sense of unease.
The company designs, manufactures, and sells weapons systems and military hardware.
Despite devoting 42 pages of its 2022 annual report to sustainability, I doubt whether the company would satisfy the criteria of so-called ethical investors.
But the company brands itself as a technology business. It says its products help governments meet their primary responsibility of providing security and safety for their citizens.
Here to stay
But whether I like it or not, war is big business.
According to the Council of Foreign Relations, there are currently 29 active global conflicts.
This explains why defence spending in 2022 was a record-breaking $2.24trn.
I must also be mindful that if I objected to investing in BAE Systems on ethical grounds, I’d be a hypocrite. I already have a stake in Rolls-Royce Holdings — its defence division contributed 29% of revenue last year.
But I justified this investment on the basis that its activities were lawful. Providing a company sticks to the rules — and pays its taxes — I’d consider having its stock in my portfolio.
On this basis, I wouldn’t rule out owning shares in BAE Systems.
Dilemma
But I don’t want to invest at the moment.
I like shares that pay a generous dividend. Although the company has grown its payout impressively in recent years, I think a yield of around 3% is on the low side.
There’s plenty of scope for increasing it further — it accounted for 49% of pre-tax profit in 2022 — but the company’s directors remain cautious.
There are many stocks in the FTSE 100 presently offering far better returns although, some are in other sectors like mining, energy, and tobacco, that also fall foul of ethical, social, and governance principles.
Colleen Hoover, the American author, once wrote: “Find a balance between head and heart“. She was writing about the best way to approach life. But I think this advice is equally relevant when it comes to choosing stocks.
