Should I buy more BAE Systems shares at 1,320p?

This investor in BAE Systems shares is wondering whether to add to his holding while the FTSE 100 defence stock is stuck around £13.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

BAE Systems (LSE: BA) shares have done incredibly well in my portfolio since I bought them in 2022. I’m a big fan of adding to winning stocks, so should I do that here?

A surging FTSE 100 share

Since Russia’s tragic invasion of Ukraine, BAE stock has more than doubled. It’s jumped 19% in 2024 alone, far outpacing the FTSE 100‘s return of 5.6% (both figures excluding dividends).

Over five years, it’s rocketed 166%. Only Frasers Group (up 220%), Pershing Square Holdings (202%), and 3i Group (177%) top that.

However, the BAE share price has dipped 5.7% since reaching 1,400p on 10 June. While it was due a breather, there do seem to be a couple of things that might be weighing on the shares.

First, French plane maker Airbus dropped a profit warning on 25 June. This hit the whole Europe aerospace and defence sector, to which BAE belongs. Airbus shares tanked 14% in the days following the announcement.

Perhaps more noteworthy, there have been reports of Russia entering peace talks with Ukraine. While both sides seem miles apart on what they would be willing to concede, this might foreshadow a slump in the share price.

Logic suggests that the defence sector could sell off if peace breaks out. So this could be a risk buying the stock near its all-time high. Unfortunately though, as things stand, world peace seems like a long shot.

Solid growth forecast

Last year, BAE’s order book grew by £9bn to reach a colossal £58bn. This year, the company is expected to grow its revenue by 11% to £28.1bn, with operating profit also increasing by low double-digits to nearly £3bn. After that, growth should be solid but slower in 2025 and 2026.

The stock is currently trading on a forward price-to-earnings (P/E) ratio of 19.5. Is that expensive? Well, it’s cheaper than Rolls-Royce (30) and the sector average (around 40).

That said, perhaps the whole European defence sector is now overvalued. If that’s the case though, I find it reassuring that BAE stock isn’t among the most expensive of its peers.

Another positive here is that the firm continues to buy back its own shares. In 2023, it repurchased £561m worth of shares, equivalent to 1.9% of the outstanding share capital.

There’s also a dividend carrying a forward yield of 2.45%, which I expect will continue growing. Last year, the company hiked its payout by 11%.

Should I buy more shares?

The company provides some of the world’s most advanced defence solutions, spanning land, sea, air, cyber, and space. The quote below highlights the breadth of offerings.

Our focus on operational excellence continues… as we execute on complex, long-duration programmes like Dreadnought, Type 26 and Hunter Class frigates, Typhoon and F-35 jets, electronic warfare systems, combat vehicles, and many other programmes.

Charles Woodburn, CEO of BAE Systems

Looking forward, management is understandably bullish given how nations are bolstering their defence capabilities. The average defence spending in Europe was 1.6% of GDP last year, short of the 2% target set by NATO. It could end up well above 2% in future given how bad the geopolitical situation is.

If BAE dips beneath 1,300p, I think I’ll buy more shares.

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, Pershing Square, and Rolls-Royce Plc. The Motley Fool UK has recommended BAE Systems and Rolls-Royce Plc. 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.

More on Investing Articles

Investing Articles

FTSE 100 or S&P 500: where should I invest?

UK investors are often drawn to the high growth of US stocks. But there are pros and cons to be…

Read more »

Investing Articles

2 of the best US growth and dividend stocks to consider!

These heavyweight US stocks have been delivering tasty investor returns for decades. Here's why they could remain great picks for…

Read more »

Investing Articles

I reckon these 2 penny shares are hidden gems worth a closer look!

Some penny shares are well-known, whereas many others go under the radar, but that doesn’t necessarily mean they aren’t potentially…

Read more »

Investing Articles

Just released: our 3 best dividend-focused stocks to buy before August [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

2 FTSE 100 shares with blockbuster yields investors should consider buying

Our writer has noticed that these FTSE 100 shares offer mammoth dividend yields, and reckons investors should take a closer…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Down 36% and yielding 7.8%, is this FTSE 250 share a bargain?

Christopher Ruane looks at a FTSE 250 share with a sizeable dividend yield and a recent record of dividend growth.…

Read more »

Investing Articles

Is Barclays one of the FTSE 100’s best bargain stocks?

Right now, Barclays' shares are cheaper than those of FTSE 100 rival stocks Lloyds and NatWest. So should I buy…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Is a takeover offer about to boost the Rentokil stock price, and should I buy?

The Rentokil share price is up 10% on takeover rumours. Is it a stock to buy or one to be…

Read more »