BAE Systems plc Set For 5% Dividend Yields!

The engineering sector is perhaps not best know for high dividend yields, but BAE Systems (LSE: BA) (NASDAQOTH:BAESY) looks set to reward its shareholders with a yield of 5.1% this year.

baeAnd if the pundits have it right, we should see that rising to 5.3% next year and to 5.5% in 2016.

Dividend cover is important, too — we’ve had too many examples of companies forced to cut their dividends when their earnings don’t come up to par. But there looks to be no problem there with BAE, whose dividend should be almost twice covered by earnings.

Earnings paused

Those earnings are key to reliable dividends, and though there’s a 5% drop expected this year (largely due to cutbacks in defence spending), analysts are predicting a return to slow but steady growth in EPS from next year.

At today’s price of 404p, the valuation of the shares is by no means stretched. Forecasts for 2014 suggest a forward P/E of only 10, compared to a current FTSE 100 forward average of 17. And that looks set to drop as low as 9.5 by 2016.

It’s true that the consensus for earnings has slipped back a little over the past 12 months, with a forecast for 42.3p a year ago dropping to the current 39.8p. But the dividend forecast has remained stable — from 20.8p a year ago to 20.6p today.

The tipsters are divided

The range of individual recommendations is pretty evenly spread too, which does surprise me a little. While we have seven analysts with Strong Buy or Buy recommendations, there are five putting out Strong Sell or Sell vibes — and we have six sticking with Hold.

BAe Systems Hawk 102DI’m guessing that we’re seeing a split between those who see the shares as undervalued on current fundamentals, and those who fear a prolonged slowdown in the defence and aerospace markets.

The professionals in the City, however, do seem to have a much shorter horizon than the typical Foolish investor, and in the long term it just has to be a growth industry. I’m looking at 20 years or more myself, and on that timescale I can only see BAE shares as cheap.

Time to buy?

I added BAE to the Fool’s Beginners’ Portfolio back in October 2012 at a price of 332p, so we’re nearly 20% up since then — 28% including dividends. We were considerably further ahead late last year, but the BAE share price has fallen back over the past six months.

But for me, that’s a sign that we should consider topping up!

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Alan does not own any shares in BAE Systems.