BAE Systems plc’s Dividends Are Rising Nicely

BAe SystemsAerospace and defence companies have had a tough time during the recession, what with government cutbacks all over the place, haven’t they?

Well, the BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US) share price has actually kept pace with the FTSE 100 for the past five years, although it did dip lower in 2011 and has underperformed by a couple of percent in the past 12 months. Overall, BAE and the top index are both up around 40% over the period.

EPS steady, dividends up

And if we look at earnings per share (EPS) over the past five years, we see it erratic but pretty much holding level — EPS in 2013 was slightly ahead of 2009, and is forecast to drop by a net 7% over the next two years.

And we see the dividend rising year-on-year at a pace that has easily outstripped inflation, which is gratifying.

All in all, that’s not at all bad for a company in an industry that’s supposed to be on the ropes.

Here’s a quick snapshot:

(to Dec)
EPS change Dividend Yield Cover Change
2009 +8% 16.00 4.5% 2.51x +10.3%
2010 -1% 17.5p 5.3% 2.27x +9.4%
2011 +15% 18.8p 6.6% 2.43x +7.4%
2012 -15% 19.5p 5.8% 1.98x +3.7%
2013 +8% 20.1p 4.6% 2.09x +3.1%
-11% 20.4p 4.5% 1.84x +2.5%
+4% 20.9p 4.6% 1.87x +2.5%

* forecast

With EPS largely static over the period, the increasing dividend has cut into BAE’s cover, but it should still be adequately covered by 2015.

International sales strong

At first-half time this year, BAE upped its interim dividend by 2.5%, suggesting that full-year forecasts won’t be far off. Though sales were down, chief executive Ian King told us that the year should be weighted towards the second half. He also pointed out that, while UK and US defence spending remains constrained, BAE is doing well in international markets with a “substantial presence in the Kingdom of Saudi Arabia“, and that the firm’s order backlog stood at almost £40bn.

But what about BAE’s long-term plans for handing cash to shareholders? The company said it aims for “dividends in line with its policy of long-term sustainable cover of around two times underlying earnings“, saying that it will also “make accelerated returns of capital to shareholders when the balance sheet allows“.

For a long-term dividend investment, we should be looking not only for strong yields now, but also for long-term rises above inflation. If you’d bought BAE shares five years ago when they could be had for around 350p, the 4.5% forecast for this year would actually get you an effective 5.8% on the price you paid.

Cash is key

Even if, in the short term, BAE’s dividend rises might struggle to beat inflation, especially as cover will need to rise a little to reach two times, that cash-return policy makes it clear that it is a key long-term priority.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.