Why Is BAE Systems plc So Cheap?

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.

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