The unfortunate dependability of armed conflict has made defence stocks hugely lucrative stocks to hold in years gone by. Their appeal as a safe haven following the Covid-19 outbreak earlier in 2020 hasn’t been quite so robust, though. This is because UK share investors reckon even major players like BAE Systems (LSE: BA) might be hit by reduced arms budgets as governments adapt to the recent economic crash.
In my view, defence spending is unlikely to take a hit because Western governments feel they can’t afford not to continue boosting their arsenals. Global defence expenditure rose at its fastest rate for around 10 years in 2019. And, amid concerns over Russian and Chinese expansionism rising, terrorist activity and cyber attacks on the rise, now’s not the time to expect arms spending to drop.
Reports circulating today on future UK spending seem to have confirmed my belief. Whitehall sources suggest that the Ministry of Defence will receive somewhere in the region of an extra £15bn over the next four years to upgrade and overhaul current technologies. This huge hike comes despite the British economy suffering its most calamitous downturn since the early 1700s. An announcement to confirm the decision is expected in the coming days.
A truly-global UK share
At the same time, the defence sector can rely on strong defence spending from the US too. This is even though President-elect Joe Biden is likely to pursue considerably less-hawkish foreign policy than the current White House incumbent.
As BAE Systems has said in recent days: “There has traditionally been strong bipartisan support for defence in the US and we don’t anticipate that will change.” Indeed, the US faces the same problem as the UK in that its ageing military equipment desperately requires updating. This will require serious attention from whoever leads the world’s biggest arms spender for the next four years.
For BAE Systems though, it isn’t all about the US and the UK. Rising political tension in the Middle East means that hardware sales to Saudi Arabia should remains strong. Its Australian division is likely to soar in the years ahead as its Hunter Class Frigate programme progresses. This UK share can also look forward to rising sales in its Asia Pacific markets as wealth levels rise. BAE Systems currently sources almost a quarter of total sales outside the UK, US, Australia and Saudi Arabia.
Too cheap to miss?
BAE Systems currently offers plenty for UK share investors to get their teeth stuck into. Yet I don’t believe its bright profits outlook is reflected at current prices. The FTSE 100 share’s 2020 price drop leaves it trading on a rock-bottom forward P/E ratio of 10 times.
This isn’t all for value investors to get excited about. Today BAE Systems carries a mighty 5% dividend yield as well. All things considered, I reckon this UK share is a brilliant pick for ISA investors like me.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.