How Strong Are BAE Systems plc’s Dividends?

baeIf you ask people what they think of BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US), I expect a good few would paint a picture of a company ploughing lots of money into R&D, relying on earnings and share price growth, and not having much spare cash to be paying high dividends.

But they’d be wrong on the dividends.

Nice yield

In fact, BAE rewarded shareholders with a pretty decent 4.6% yield for the year ended December 2013, and it was more than twice covered by earnings.

And that was the lowest yield for two years, with 2011 having brought in a whopping 6.6%!

BAE’s dividends have been climbing steadily, from 16p per share in 2009 to 20.1p in 2013, and forecasts suggest that’s set to continue.

There’s a payout of 20.6p currently predicted for 2014, and on the latest share price of 428p that would provide a yield of 4.9% — covered 1.9 times by forecast earnings per share (EPS).

For the year after, the City’s analysts are suggesting a further hike to around 21.2p, lifting the yield to 5.1%, and again cover would be around 1.9 times.


What does the company say? With its 2014 final results, BAE told us its continuing approach is to “pay dividends in line with its policy of long-term sustainable cover of around two times underlying earnings“, telling us it also plans to “make accelerated returns of capital to shareholders when the balance sheet allows“.

For this year, BAE expects EPS to drop by 5-10%, partly due to a one-off benefit from the completion of its Salam price negotiations with Saudi Arabia but partly due to “continuing US budget pressures“.

But with EPS growth expected to return in 2015, and long-term rising earnings looking likely to continue to support twice-covered dividends, I think we’re looking at a safer annual income than many will think.

Time to buy?

The only anomaly really is that the high yield is caused by an oversold share price — with forward P/Es of 10.8 and 10.5 for the next two years, against a FTSE 100 long-term average of about 14, BAE shares just look too cheap to me.

So if you buy now for those 5% yields, I reckon you’ll get some share price appreciation over the next few years as a bonus.

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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.