Why BAE Systems plc Should Be A Candidate For Your 2014 ISA

So, we’ve been through a tough few years for the aerospace and defence industry, and companies like BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) have been struggling, have they?

And we don’t want to risk wasting our ISA allowance (which will soon rise to £15,000) on them, do we?

Well, take a look at this:

Dec EPS Change P/E Dividend Change Yield Cover
2009 40.1p +8% 9.0 16.0p 4.5% 2.5x
2010 39.8p -1% 8.3 17.5p +9.4% 5.3% 2.3x
2011 45.6p +15% 6.3 18.8p +7.4% 6.6% 2.4x
2012 38.7p -15% 8.7 19.5p +3.7% 5.8% 2.0x
2013 42.0p +8% 10.4 20.1p +3.1% 4.6% 2.1x
2014* 40.5p -4% 10.2 20.6p +2.5% 5.3% 2.0x
2015* 41.6p +3% 9.9 21.0p +1.9% 5.4% 2.0x

* forecast

Sure, earnings have been a little bit erratic, but the dividend hasn’t faltered — in fact, dividend rises have been comfortably beating inflation. The yield, at around 5% and better, is excellent, and it’s been covered just fine by earnings.

BAE did well!

BAe Systems Hawk 102DSome struggle, huh?

Admittedly, the share price took a bit of a hit in February when 2013 revenues came in around £700m below analysts’ expectations, with cuts in US defence spending taking the blame. But at 418p, the share price is still up 6% over the past 12 months, which is a bit ahead of the FTSE 100 — and don’t forget that FTSE-beating 4.6% dividend for the year!

The picture is not so rosy over five years, with only a 20% gain against the FTSE’s 70% — but during a tough period for the industry, that’s really not so bad.

ISA investments are really best suited to the very long term anyway, and over the past 10 years BAE is back on top again — 120% compared to the FTSE’s 50% (and did I mention those superior dividends?)

Long term bet

What about the future? Even if we assume a modest 3% growth per year in the share price (which I think is pretty conservative considering the low forward P/E of only 10), and reinvest an annual 5% dividend over the next 20 years — we’d end up turning every £1,000 put into BAE shares into nearly £4,700!

As long as you’re happy the aerospace and defence business has a good long-term future, BAE has to be worth considering, don’t you think?

Investments in strong dividend payers like BAE Systems could even help you reach millionaire status by the time you retire, and an ISA is a good way to protect a chunk of your investments towards it -- and the expert Motley Fool report Ten Steps To Making A Million In The Market can help you too.

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Alan does not own any shares in BAE Systems.