What Are BAE Systems plc’s Dividend Prospects Like Beyond 2014?

Today I am looking at the dividend outlook for defence colossus BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) beyond 2014.

Dividends primed to keep on firing

The effect of budgetary restraints on defence spend, not to mention the unpredictable nature of contract timings, has weighed on the defence sector’s earnings performance in recent years. Still, this has not dented their popularity amongst investors seeking chunky dividends, and I believe a recovery in Western economies — combined with escalating wealth in emerging regions — should drive earnings, and thus shareholder payouts, comfortably higher in future years.

BAE Systems was cheered in December when US lawmakers agreed to raise this year’s arms budget to $520.5bn, while signs of a financial uptick on both sides of the Atlantic augurs well for future budgets — both Washington and London account for a vast proportion of group profits. Meanwhile, BAE Systems is also reporting increased business in the Middle East and Asia, and is a major supplier to Saudi Arabia in particular.

City forecasters anticipate BAE Systems will keep its progressive dividend policy on track for 2013 with a 20.3p per share payout. And this is anticipated to rise 3% this year, to 20.9p, before picking up to 3.4% in 2015, to 21.6p — projections that carry chunky yields of 4.8% and 5% respectively.

Still, analysts expect earnings to remain lumpy through to 2015, with an 10% improvement expected in last year’s results — due on Thursday, February 20 — followed by a 2% drop in 2014 and then a 4% rise in 2015. Despite this, the dividend is expected to remain well protected, with coverage of 2 times stretching through to the end of next year, bang on the widely-regarded safety benchmark.

Besides, BAE Systems has a terrific record in recent years of lifting the dividend even in times of fluctuating profits pressure. Indeed, the defence giant lifted the full-year payout 3.7% last year even as earnings dropped 15%, and the firm carries a compound annual growth rate of 7.7% dating back to 2008.

Investors can also count on the firm’s meaty £1.92bn cash pile as of the end of June to keep payouts ticking higher, even if reserves have fallen from £2.46bn at the same point in 2012. Indeed, the strength of the company’s cash stack is enabling it to reward shareholders through an extensive share repurchase scheme, with BAE Systems planning to return £1bn to shareholders through to February 2016.

Although dividend growth for the medium term is lower than in previous years, I believe that an uptick in the projected 2015 payout provides a great omen for payout prospects over a longer time horizon, with global defence spend poised to tick steadily higher.

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> Royston does not own shares in BAE Systems.