I like to add another UK stock to my portfolio every month. But what if I was limited to just one more purchase for life? Then I’d be in a sticky position.
I’m assuming that I’d be allowed to hold the stocks I already have, so I’d need something that compliments them. I’d look for a stock in a key sector where I don’t have much exposure at present. That offers me long-term dividend and income growth prospects. This is my last shot at both, remember.
And my choice? It’s a bit of a no-brainer, actually. I’d make defence manufacturer BAE Systems (LSE: BA) my last ever UK stock pick.
This is my number one
I’m surprised I don’t already hold it, to be honest. It’s been a solid performer for as long as I can remember. It was always a little bit too expensive, while the yield was always on the low side. This is often the mark of a premium stock, and definitely the case here.
Lately I’ve made a habit of targeting dirt-cheap, high-yielding dividend stocks, in the hope of benefiting when their share prices recover.
BAE Systems does not match either of those criteria. Today, it trades at 19.25 times earnings, notably higher than the FTSE 100 average of around 10 times. Its dividend yield is 2.48%, compared to 3.6% across the index.
I’ve always been waiting for a slightly better time to buy it, but now I have to concentrate. This is my last UK stock purchase and I can’t think of a better one.
Recent performance has been terrific. The share price has grown 83.53% over the last five years, compared to just 8.28% on the FTSE 100 as a whole.
It’s up 29.8% over one year against 11.49% on the index. It’s up almost 10% in the last week, but that’s for a desperately sad reason, as the Israel-Hamas conflict reminds us that we live in a cruel and uncertain world. As if we needed one, after Russia’s invasion of Ukraine. That also boosted the BAE Systems share price.
Sadly, my choice of BAE Systems reflects my current faith in the prospects of peace breaking out in our unhappy world.
I’ll buy this soon
The firm’s first-half results, published on 2 August, showed new orders worth a thumping £21.1bn. This lifted its order backlog to a record £66.2bn. Sales increased by 11% to £12bn, while underlying earnings climbed 10% to £1.3bn.
The yield may look relatively low, but the directors are progressive, hiking the interim dividend by 11% to 11.5p per share. They can afford to do so, with free cash flow of £1.1bn.
In June, BAE commenced the third tranche of its £1.5bn share buyback programme, and there’s another £1.5bn coming after that. Shareholders are being handsomely rewarded.
As with any stock, there are risks. BAE Systems shares are fully valued. It would have been better to buy them a year or two back. While the West needs to spend more on defence, government budgets are under immense pressure as debt rises. There may be other risks, but sadly, peace breaking out isn’t one of them.
Happily, I’m free to buy as many stocks as I would like. Despite that, BAE Systems is now right at the top of my shopping list.
