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.
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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.
