Why BAE Systems plc Is A Great Share For Novice Investors

Much as I liked the old British Aerospace name and turn my nose up at bland names like XYZ Systems these days, I do think the company behind the BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) name is a good one — and a great one for newcomers.

And I want to tell you why:

First off, I should tell you that I have BAE Systems in the Fool’s Beginners’ Portfolio, and we’re up around 35% on it since adding it almost exactly a year ago — it’s not a real-money portfolio, but I run it exactly as if it were.

A large part of my decision was my conviction that BAE, along with a number of other companies pressed by spending cuts, was seriously undervalued at the time. So what, now that at least some of that undervaluation is out, still gives me optimism?

It makes stuff

I confess I have a weakness for companies that actually make stuff — seriously tangible stuff, and the more of it the better. I want to be able to kick a company’s products, and the more it hurts my foot the better.

BAE gets absolute top marks on that measure — combat aircraft, nuclear submarines, tanks, aircraft carriers, radar, electronics… there’s a lot of broken-toe potential there!

It’s all stuff that is in big demand, too, and it’s in demand all over the world. BAE’s business is primarily in the USA, UK and Europe, but it makes significant sales in Saudi Arabia and Australia.

What recession?

Sales have actually been going quite well during the recession, despite the effects of lower defence spending.

Turnover in 2012, at £17.8bn, was 15% down from 2010’s recent peak of £21bn, but operating profit was picking up and the company’s order backlog had risen to £42.4bn from £39.1bn a year previously.

Earnings per share over the past five years have been a little erratic, but pretty stable overall, and there’s a 10% rise forecast for the year to December 2013. But more importantly than that, BAE has kept growing its dividend all the way through.

Last year saw a yield of 5.8%, and this year’s forecast dividend rise should leave us with a lower 4.5% yield, but only because the share price is up so nicely.

For novices looking at multi-decade investments, the current dividend levels are perhaps not that crucial.

But what it shows me is a company that is committed to rewarding its shareholders through dividend payments, and with the payments usually being more than twice-covered by earnings, they don’t look to be at any risk.

What debt?

BAE has another characteristic that really can help reduce risk for newcomers — it does not trade on large debt.

In fact, at December 2012 the company had net cash on the books, and the largest year-end debt in recent years was just £1.3bn in 2011, which really is not very much for a £14.5bn company with an annual turnover approaching £18bn.

The only long-term risk I see to BAE is if all the countries in the world should suddenly become friends and never again want to buy any weapons.

Finally, if you like the idea of long-term dividend income, you should get a copy of the Motley Fool's Top Income Share report. I won't tell you which company it is, but I'll tell you one thing -- at more than 5.7%, its dividend yield currently eclipses BAE's, and it's one of the most reliable in the FTSE.

If you want to know more, click here to get your free copy today.

> Alan does not own any shares mentioned in this article.