Don’t be fooled by the fall in BAE Systems (LSE:BA.) shares following the release of full-year trading numbers today (21 February). The FTSE 100 weapons maker posted another brilliant trading update that underlines the strength of the defence market right now.
I believe BAE’s 3% share price reversal on Wednesday reflects some mild profit-taking by investors following stunning recent gains. I’m expecting it to resume its impressive uptrend before long, and am looking to add it to my own portfolio when I next have cash to invest.
Here’s why.
Strong numbers
In another strong year for the FTSE firm, revenues rose 9% to £23.1bn in 2023, while operating profit marched 8% higher to £2.6bn.
Order intake, meanwhile, rose £600m year on year to £37.7bn thanks to a series of high-profile contract awards for its Maritime division. As a consequence, BAE Systems’ order backlog soared to a record high of £69.8bn, up almost £11bn.
In other positive news, free cash flow improved to £2.6bn from £2bn a year earlier. This helped BAE Systems to lift the annual dividend 14%, to 63.2p per share.
Favourable conditions
At £12.15, the share price has more than doubled since Russia invaded Ukraine in early 2022. Demand for its critical hardware has boomed in the aftermath, and City experts believe there’s more of the same ahead.
Analyst Adam Vettese of eToro noted that “the record order intake and backlog… gives the impression that there is another solid year of growth to come from the firm in 2024.”
The International Institute for Strategic Studies (IISS) certainly expects the trading landscape to remain fertile. It recently predicted that global defence spending — which jumped 9% last year to a record $2.2trn — will increase again this year.
Industry giant
UK share investors have a wide range of defence stocks to choose from today. But as today’s results show, BAE Systems could be an effective way to get exposure to the industry.
As the country’s biggest defence contractor, the £38bn market cap company has the scale and the expertise across multiple product sectors to exploit this opportunity to the fullest. In fact it has leading roles in segments like submarine and tank construction, qualities that make it a critical supplier with the US and UK armed forces
A top FTSE 100 stock
Defence companies like this are under constant threat of earnings-damaging project delays. On top of this, parts of the industry are beset by supply chain issues that could hinder operational execution.
Yet on balance I think BAE Systems could be an excellent investment to consider today. Rising fears over Russian and Chinese expansionism — combined with political upheaval in the Middle East — mean the outlook for defence spending remains (admittedly tragically) better than it has for decades.
eToro’s Vettese also commented that “with a bump up in the dividend and more buybacks coming, shareholders will unlikely be going anywhere given the handsome returns the shares have already generated“.
The strong possibility of more excellent rewards means I’m hoping to buy BAE shares myself very soon.
