What Dividend Hunters Need To Know About BAE Systems plc

Today I am looking at whether BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) is an appealing pick for those seeking chunky dividend income.

Dividend growth expected to continue firing

Enduring budgetary pressures from key Western customers has seen BAE Systems’ earnings fluctuate wildly during the past five years. But despite a backdrop of erratic sales and lumpy order books, the defence giant has still managed to keep annual dividend growth rolling, lifting payments at a compound annual growth rate of 5.9% since 2009.

The business is anticipated to keep its progressive dividend policy in place again this year, despite an expected 5% slippage in earnings. City analysts are currently pointing to a total dividend of 20.6p per share, which if realised would represent a 2.5% on-year rise.

With the critical US and UK economies clearly on the mend, and sales to non-Western customers ratcheting up significantly, earnings — and consequently dividends — are anticipated to continue marching higher in coming years.BAe Systems Hawk 102D

Indeed, earnings growth of 3% and 4% is anticipated in 2015 and 2016 respectively, readings which are expected to underpin dividend expansion of 2.4% next year, to 21.1p, with an additional 3.8% rise expected in 2016 to 21.9p.

Such projections create dividend yields far in excess of a forward average of 3.2% for the complete FTSE 100. Indeed, this year’s 5.1% reading marches to 5.3% in 2015 and then to 5.5% in 2016.

A secure dividend selection

BAE Systems has maintained dividend coverage around the safety benchmark of 2 times forward earnings for many years now, and the company is anticipated to keep this reading steady at between 1.9 times and 2 times through to the end of 2016.

Dividend investors should also be confident that the firm’s chunky cash pile should facilitate decent earnings growth in coming years. Collapsing profits and working capital swings saw cash and cash equivalents rattle 33% lower last year, although reserves still stand at a considerable £2.2bn. This considerable capital position is also funding this year’s £1bn share repurchase scheme.

BAE Systems confirmed in this week’s interims that the business continues to trade in line with expectations. The company has benefitted from the greater revenues predictability created by the US defence budget agreement made late last year, while in the UK a number of ‘long-term, stable contracts in the maritime and military air sectors‘ has also boosted visibility.

With trade from emerging markets such as Saudi Arabia also on the up, I expect BAE Systems to deliver improving growth and dividend prospects in coming years.

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Royston does not own shares in BAE Systems.