BAE Systems plc & National Grid plc Show Their Defensive Strength

Investors have a fight on their hands as the stock market plunges again. At times like these, your portfolio needs all the back-up it can get. So how about these two reliable old soldiers?

BAE Systems

This year’s stock market blitz hasn’t spared the defence sector and BAE Systems (LSE: BA) has seen 6.5% blown off its share price in the last month alone. Investors won’t be too worried by that. Trouble is BAE’s business, and the company has shown its fortitude by withstanding US and UK defence budget cuts in the wake of the financial crisis, and the scaling down of deployments in Afghanistan and Iraq.

Geopolitics are swinging back in its favour as the US and UK ramp up their defence spending again, although Deutsche Bank has warned BAE’s margins could be hit by the Ministry of Defence’s “lowest-price-wins” procurement reforms. This may be offset by the fact that its other major customer, Saudi Arabia, is pursuing a more aggressive foreign policy, with interventions in Yemen and talk of sending ground troops to Syria as part of the wider regional struggle against Iran. Saudi largesse may be hit by the falling oil price, but weapons spending is a priority. 

Portfolio security

BAE Systems is wisely evolving beyond its traditional specialist areas such as aircraft carriers, tanks and fighter jets into new areas of conflict such as cyber security, which should promise more stable revenue streams. Its share price is up a punchy 45% over five years, against a 5.5% drop for the FTSE 100 as a whole, and earnings per share are pointing the right way after recent slippage, with forecast growth of 5% this calendar year.

BAE’s valuation of 12.6 times earnings almost comes as a surprise with so many FTSE 100 companies trading on single-digit P/Es. The 4.3% yield is solid and nicely covered 1.9 times. We live in an uncertain world, but the sad truth is that this plays to BAE Systems’ strengths.

National Grid

Energy transmitter and distributor National Grid (LSE: NG) has been my favourite utility play for yonks and it has done nothing to disappoint in that time. The FTSE 100 is down 16% over the past 12 months but NG has stood its ground, rising 5% over the same period. That’s exactly what you want when you invest in the utility sector. But I didn’t expect this: over five years it’s starting to look like a pacy growth stock, up 75% in that time.

Robust growth prospects combined with the built-in security of a highly-regulated, natural monopoly, what more can you ask for? OK, how about a juicy progressive yield? Right now you get 4.5%, covered 1.4 times, which management aims to grow by at least RPI inflation. Just the job in our low-interest-rate world. I’m not the only one to recognise National Grid’s defensive prowess, so be prepared for its pricey valuation, currently 16.5 times earnings.

You can’t expect National Grid to repeat its recent growth surge (it’s still a utility, after all) and EPS are only forecast to rise 1% this year. But I’m sticking to my guns: this stock continues to offer rare long-term security in a world of trouble.

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Harvey Jones 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.