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Is BAE Systems plc A Super Income Stock?

Disappointing Performance

While the FTSE 100 has delivered a stunning share price rise over the last five years, BAE (LSE: BA) (NASDAQOTH: BAESY.US) has only managed to post gains of 23%. Its returns were not helped by a profit warning in February but, even before the effects of that on its share price, it was lagging the wider index by a considerable amount. Does this mean that BAE is not worthy of a place in income-seeking investors’ portfolios? Or is it, in fact, now a super income stock?

A Great Income Play

Although profits for the year are set to be below original forecasts, BAE still easily affords its current dividend. Indeed, it currently pays out around half of net income as a dividend, which means that it is not only very well covered, but also that BAE has the scope to be more generous with the amount of cash it pays to shareholders.

BAe Systems Hawk 102DCertainly, a business such as BAE will require a relatively large amount of capital to be reinvested in the business, but it could be argued that this aim could be achieved while also paying more profits out to shareholders as a dividend.

Of course, dividends are not exactly low at the moment. BAE yields 4.8%, which is not only significantly higher than the FTSE 100 but is well ahead of inflation and the best that high-street savings accounts can offer. Furthermore, BAE is forecast to increase dividends per share in 2014 and 2015 in spite of the aforementioned profit warning, with an annualised growth rate of 2.3% being forecast by the market. Although not as high as many of its index peers, it is still above inflation.

Looking Ahead

Trading on a price to earnings ratio of just 9.9, BAE is extremely cheap. While the profit warning has not helped to improve market sentiment after a lacklustre five years, BAE remains a solid company that is very cheap. Although earnings are expected to fall this year, they are set to bounce back next year and, when combined with a high yield and above-inflation growth prospects, it shows that BAE is a super income stock at a great price.

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Peter owns shares in BAE.