The BAE Systems (LSE: BA.) share price edged up 1% on Thursday (1 August) morning, on the back of H1 results.
Even after a recent dip, we’re still looking at an 18% gain 2024. And 140% over the past five years. Can it keep going? Let’s see what the first half brought.
Guidance lifted
CEO Charles Woodburn said the company is “well positioned for sustained growth in the coming years.” And the firm lifted its full-year guidance.
BAE says it now expects FY sales to rise by 12%-14%, with underlying EBIT up by the same percentage range and underlying earnings per share (EPS) up 7%-9%.
That hints at a year-end price-to-earnings (P/E) multiple of around 19 based on the current share price.
Is that good value? Well, it’s not obviously cheap to those who use the PEG ratio. That compares the forward P/E with the expected EPS growth rate. And anything under 1 is often considered attractive.
In this case, though, we’d be looking at a PEG of around 2.4.
Bags of cash
There’s more to BAE Systems than just growth though. The company generates strong cash flow from which it can pay dividends.
Free cash flow in the period only came in at a low £219m. But BAE reckons it should exceed £1.5bn by the end of the year. And it says that should bring free cash for for the three years to 2024 to more than £6bn.
The interim dividend is up 8% to 24.5p per share. The same rise for the final dividend should bring the full-year yield to 2.5%. Hmm, that’s not great really, is it?
Dividend cover
Well, it might be better than it seems. The thing is, BAE’s dividends are typically more than twice covered by earnings, and forecasts see that continuing.
Strong cover coupled with dividend raises that beat inflation can be worth more than a bigger yield today, in the long term.
If we add an order backlog that’s now reached £74bn, and forecasts that would drop the P/E to 16 by 2026, BAE Systems shares look like a slam-dunk buy, right?
Cautious optimism
Well, I’m optimistic, but I’m also cautious. With a lot of stocks these days I see short-term risk, but a solid long-term outlook.
At BAE, I can’t help thinking that might be reversed. Right now, these impressive figures are driven by an upsurge in global defence spending. Ukraine, the Middle East, and other threats are pushing armaments budgets up.
But how long will that last?
Future budgets
The 2025 US budget request only has a 1% rise in defence spending. And the new UK government has already announced a Strategic Defence Review.
A lot could depend on how long it takes EU states to get their spending up to the targeted 2% of GDP. And of course, whether they stick to it once today’s threats subside.
To me, the BAE Systems share price looks about right, and that thought is boosted by the market’s lacklustre response to this update. I’ll wait to see how the full year turns out.
