Why Is BAE Systems plc So Cheap?

BAE Systems plc (LON: BA) shares are up, but still looking good value.

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BAe SystemsWhen I look around the FTSE 100’s top blue-chip shares, the kind that have been boosting investors’ portfolios for decades, I really don’t expect to see many lounging on price to earnings (P/E) ratios as low as 10 or so.

But that’s the case with BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US), which is on a forward P/E of just 10.8 for the year to December 2014, dropping to 10.5 for the following year. But that is, at least, higher than it has been — we had a multiple as low as around six back in 2011.

Share price rising

Over the past three years the share price has appreciated somewhat, putting in a gain of nearly 40% to 420p, while the FTSE only managed half that at 20%.

And over that period, BAE has paying dividends that way outstrip the FTSE’s average yield of 3% — there’s 4.9% forecast for the current year.

BAE has, of course, been suffering from a global slowdown in defence spending, with earnings per share this year expected to be 15% below 2011’s level — but we should hopefully see growth start to return from 2015.

The City’s analysts are expecting a 7% fall in earnings per share (EPS) this year, but that comes after an 8% gain last year and they have a 3% rise penciled in for the year ending December 2015.

Dividends strengthening

Dividends are expected to keep rising. The 20.6p indicated for this year represents a 2.5% lift, and there’s a further rise of 2.8% suggested for next year. Those gains are a little ahead of inflation, which is running at a smidgen below 2% at the moment, and they would maintain yields of around 5% and rising should the share price not move.

BAE’s dividends have always been well covered too. Over the past couple of years we’ve seen cover by earnings of around 2 times, and forecasts suggest 1.9 times for this year and next.

In its latest interim update in May, BAE told us that its long-term contracts are looking good, its order backlog is “robust” and that its balance sheet “continues to be managed conservatively“.

Good value

I reckon we’re looking at a prudently-managed company whose shares are good value right now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.

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