Defence giant BAE Systems (LSE: BA.) has been a stellar performer over the past year, with the shares soaring nearly 30% as geopolitical tensions have heightened global defence spending. But recent rumblings about potential UK defence cuts have put the spotlight on this FTSE 100 stalwart. So, should savvy investors be keeping a close eye on the BAE Systems share price?
The good, the BAE, and the uncertain
The firm has been riding high on a wave of increased defence budgets worldwide. With conflicts raging and tensions simmering, countries have been beefing up their military capabilities, and the company has been more than happy to oblige. A diverse product and service portfolio, spanning everything from cybersecurity to combat vehicles, has positioned it well to capitalise.
However, the defence sector got a bit of a shock recently when reports surfaced about potential cuts to UK defence spending. The autumn statement is looming, and there’s chatter that some Ministry of Defence projects might be on the chopping block. This news sent shivers through the sector, with BAE shares taking a 2.8% hit on Monday.
Before we start battening down the hatches, it’s worth noting that the firm isn’t solely reliant on UK defence spending. In fact, it has a global footprint, with significant operations in the US, Saudi Arabia, and Australia, among others. I feel that this international diversification helps cushion any potential blow from UK budget cuts.
Moreover, the geopolitical landscape remains tense, with no signs of major conflicts cooling down anytime soon. This unfortunate reality means that global defence spending is likely to remain robust in the medium term, potentially offsetting any localised budget trimming.
The numbers
The shares are currently trading at a price-to-earnings (P/E) ratio of around 21.5 times, which is slightly higher than its historical average. This suggests that the market has already adjusted to a fair bit of optimism about future prospects. However, it’s worth noting that earnings are forecast to grow by a steady 7.34% per year.
The company also boasts a reliable dividend yield of 2.36%, which, while not earth-shattering, provides a nice income stream. With a payout ratio of 51%, there’s room for growth if earnings continue to improve. For me, the company is in decent shape, but after such a run up, I’d probably want to see better. With the shares doubling in the last five years, any disappointment or challenge could have investors heading for the exit doors.
The bottom line
So, should investors be watching the BAE share price? In a word: probably. But not for the reasons you might think. While the potential for UK defence cuts is certainly worth keeping an eye on, it’s unlikely to be a game-changer for a company of this size and global reach.
Instead, I’ll be watching management’s ability to navigate the complex geopolitical landscape and capitalise on emerging opportunities. I’ll be paying close attention to the order backlog, which stands at a hefty £66.2bn, and the ability to convert this into tangible revenue and profit growth.
For long-term investors, I’d say BAE Systems remains an intriguing proposition. However, in the world of defence, as in investing, it pays to be prepared for all eventualities. I’ll be staying on the side-lines for now, and keeping it on my watchlist.
