The BAE Systems (LSE:BA.) share price is charging higher again. As a result, the defence company’s yields currently sit below the FTSE 100 average, based on current dividend forecasts.
At £10.50 per share, its dividend yield for 2023 is at 2.8%, below the FTSE forward average of 3.7%. And for 2024 and 2025, yields clock in at 3% and 3.3%, respectively.
This doesn’t mean that BAE Systems shares are a poor choice for passive income, however. In fact City forecasters have been ramping up their dividend forecasts for the company in recent months.
What are the chances of the company meeting these payout estimates?
Dividend upgrades
It’s perhaps no surprise that forecasts have been raised lately. Trading at the business continues to impress as countries continue to rapidly build their arsenals.
As the table below shows, annual dividend per share estimates all the way through to 2025 have been lifted. The first column shows payout projections when I last examined BAE Systems’ dividend prospects in detail in late June.
| Year | Old dividend forecast | New dividend forecast |
| 2023 | 29p | 29.8p |
| 2024 | 31.4p | 31.9p |
| 2025 | 33.9p | 34.7p |
The company’s ongoing commitment to returning cash to its shareholders has encouraged brokers to act. In August, the FTSE firm announced an 11% hike in the interim dividend, to 11.5p per share. It also announced a fresh £1.5bn share buyback programme that will begin when the current one ends.
As for those forward forecasts, it’s my opinion that BAE Systems shares will deliver the dividends City brokers are expecting. Projections are covered 2.1 times by expected earnings for each of the next three years, providing a decent margin for error.
The firm’s strong balance sheet should also give it the means to meet current dividend forecasts even if profits disappoint. In fact it recently raised its cash flow estimates through to 2025.
Cumulative free cash flow is tipped at between £4.5bn and £5.5bn for the period. That’s up from a prior prediction of £4bn to £5bn.
I’d buy BAE Systems shares
There’s no such thing as the perfect stock. In the case of BAE Systems, its share price could fall if supply chain disruptions or project delays occur. The popularity of defence stocks like this also threatens to decline over the long term as ESG investing takes off.
On balance, though, I think things are looking good for this FTSE 100 share and its investors. The geopolitical landscape is becoming increasingly unstable so weapons spending is tipped to keep soaring.
Global defence sales topped $2.24trn in 2022, a year when arms expenditure in Europe rose at its fastest pace for three decades. A steady rise in spending looks set to continue as fears in the West over Chinese and Russian foreign policy grow.
It’s my opinion that dividends at BAE Systems will grow strongly over the long term. What’s more, I think that forecasts for the next few years could be set for further upgrades. I’ll be looking to buy its shares when I next have spare cash to invest.
