How BAE Systems plc Can Pay Off Your Mortgage

baeAlthough BAE (LSE: BA) (NASDAQOTH: BAESY.US) has underperformed the FTSE 100 (FTSEINDICES: ^FTSE) during 2014, with shares in the defence company being down 3% versus a flat performance from the FTSE 100, it doesn’t paint the full picture. That’s because BAE’s 2014 has been something of a tale of two halves, with the company releasing a profit warning in February and seeing its shares fall by 14% from their end of 2013 level.

However, since then BAE has mounted a comeback. Shares in the company have recovered nearly all of their losses and, with the Farnborough airshow in full-swing, BAE could continue to enjoy short-term strength. As well as this, the company has a bright long-term future and, as such, could make a positive contribution to your mortgage repayments.

Super Value

Certainly, BAE may not be the most exciting of companies. However, its valuation should get investors far more excited in future than it has done until now, since the company trades on a price to earnings (P/E) ratio of just 10.7. This is considerably lower than the FTSE 100’s P/E of 13.9 and shows that BAE offers great value at current price levels and could continue to narrow the valuation gap between itself and the wider index in future.

Super Yield

As well as offering great value for money, BAE also provides investors with a high, well-covered yield. Shares in the company currently yield a highly attractive 4.9% from a dividend that is twice covered by profit. Not only does this mean that dividends should be stable going forward, it also means that there is scope for BAE to pay out a greater proportion of profit as a dividend, which could equate to brisk dividend per share growth. Indeed, this could help to grow the 4.9% yield into a 5%+ yield over the next few years.

Looking Ahead

BAE’s profit warning in February was disappointing, however as profit warnings go it was a relatively mild one. Earnings are forecast to be 7% lower than last year before the company returns to growth of 3% next year. Certainly, this is below the FTSE 100 growth of mid-single digits, but is arguably a stronger performance than expected given the cutbacks that are currently taking place in military budgets across the developed world.

Looking beyond the short run, though, highlights BAE’s potential as a key defence company that should, over the longer term, return to higher growth rates. In the meantime, a strong yield and a narrowing of the valuation gap versus the index could help to pay off your mortgage.

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Peter Stephens owns shares in BAE Systems. The Motley Fool has no position in any of the shares mentioned.