BAE Systems plc’s Dividend Prospects For 2014 And Beyond

Many top FTSE 100 companies are currently offering dividends that knock spots off the interest you can get from cash or bonds.

In this festive series of articles, I’m assessing how the companies measure up as income-generators, by looking at dividends past, dividends present and dividends yet to come.

Today, it’s the turn of defence group BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US).

Dividends past

The table below shows BAE’s five-year earnings and dividend record.

  2008 2009 2010 2011 2012
Statutory earnings per share (EPS) 49.6p -1.9p 30.5p 36.9p 33.0p
Adjusted EPS 37.1p 39.1p 39.8p 39.7p 38.9p
Dividend per share 14.5p 16.0p 17.5p 18.8p 19.5p
Dividend growth 13.3% 10.3% 9.4% 7.4% 3.7%

As you can see, BAE has delivered overall strong dividend growth across the last five years. The average annual increase works out at 8.8% — far ahead of inflation.

However, as you’ve also no doubt spotted, the rate of dividend growth has decelerated year on year. Nevertheless, the 3.7% rise for the most recent year is still above inflation.

BAE paid a total of 86.3p a share in dividends over the five years, covered 2.3 times by total ‘adjusted’ (underlying) EPS of 194.6p, and a still reasonably healthy 1.7 times by warts-and-all statutory EPS of 148.1p.

On an adjusted basis, EPS has been broadly flat over the period. However, because management has continued to increase the dividend, cover of the dividend by earnings has declined — from 2.6 in 2008 to 2.0 in 2012.

An overall good dividend performance through a tough period of cuts in defence spending. The company’s strong dividend cover at the start of the period allowed the board to continue to increase shareholders’ annual income, despite the lack of headway on earnings.

Dividends present

BAE has so far paid an interim dividend of 8p for the current year. The analyst consensus is for a final dividend of 12.3p when the company announces its annual results on 20 February — giving a 2013 full-year payout of 20.3p (4.1% up on 2012).

Analysts see adjusted EPS rising by around 10%, to 42.8p, with dividend cover ticking up to 2.1 from 2.0.

At a share price of 434p, BAE’s current-year dividend represents a yield of 4.7%.

Dividends yet to come

Analysts are forecasting BAE’s dividend to rise by not much more than 3% a year for 2014 and 2015. With government budgets still under pressure in the company’s major UK and US markets, the analysts are cautious about penciling in much in the way of EPS growth. Forecasts imply the dividend will continue to be covered a healthy two times by adjusted earnings.

Shareholders can be optimistic about dividend progress modestly ahead of inflation while defence budgets remain constrained. In the longer term, demand for BAE’s products is unlikely to decline, and shareholders can look forward to stronger dividend growth during phases of heavier defence spending.

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> G A Chester does not own any shares mentioned in this article.