If I’d put £10k in BAE Systems shares at the start of 2023, here’s how much I’d have now

After an incredibly strong performance in 2022, BAE Systems shares have extended their FTSE 100 winning streak Into this year.

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BAE Systems (LSE: BA.) shares topped the FTSE 100 performance charts last year after rising 55%. This was unusual for the defence stock, which had long been out of favour with investors due to uncertainty around global military spending.

However, Russia’s invasion of Ukraine in February 2022 transformed the geopolitical landscape and the prospects for BAE. And as the war has sadly dragged on this year, the share price has only increased further.

So, how much would I have now if I’d invested £10,000 in the stock at the start of 2023? Let’s take a look.

A solid investment so far

In the chart above, we can see that BAE stock started the year at 860p. Today, as I write, it’s trading for 1,007p, which is a gain of 17%.

That means my £10k investment would now be worth around £11,700. That is well above the FTSE 100’s marginal gain year to date.

Better still, the highly profitable UK defence giant pays dividends. There was a payout of 16.6p per share distributed on 1 June, which would have brought my total return to about £11,893.

I note there’s a further cash dividend due to be paid at the end of November. That would take my return to just over £12,000, assuming there’s no share price movement.

Still reasonably valued

When a stock has gone up 55% in one year before adding another 17% on top, I’d expect its valuation to start looking a bit stretched. However, I don’t see that with BAE.

In fact, on a price-to-earnings (P/E) ratio of 16, the shares still look good value. For 2024, the P/E multiple drops to 15 times expected earnings. That’s slightly above the forward average of around 14 times for the FTSE 100.

So, for a slight premium to the wider index, investors get growing revenue that’s unlikely to be affected by a recession. They’d also hope to get a growing dividend, with a current 3% yield, which is covered twice over by earnings.

On top of that, the company is currently undertaking a three-year share buyback programme of up to £1.5bn. Another £1.5bn has been approved to follow that, which should boost financial metrics like earnings per share (EPS).

Further potential

Now, if the war in Ukraine suddenly ceased, I’d expect defence stocks like BAE to decline. That’s a risk, particularly as the company continues to ramp up its support, training and repairs to the Ukrainian armed forces.

That said, I’d still expect defence budgets to remain elevated due to ongoing geopolitical tensions between the US and China.

Last year, global military budgets hit an all-time high of $2.2trn, according to data released by Stockholm International Peace Research Institute (SIPRI).

However, that’s still low by historical GDP terms. During World War II, the Allies (understandably) devoted close to half of their GDP to the war effort. At the height of the Cold War, governments typically spent around 6% on defence. Last year, global military spending amounted to 2%.

So in theory, BAE’s record order backlog of £66.2bn (as of June) could rise much further.

If I didn’t already own this FTSE 100 stock, I’d buy it today to hold for many years.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ben McPoland has positions in BAE Systems. The Motley Fool UK has recommended BAE Systems. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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