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Will the Saudi controversy affect the BAE and Rolls-Royce share prices?

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Growing concerns over the disappearance of Saudi journalist Jamal Khashoggi, who hasn’t been seen since he entered the Saudi consulate in Istanbul on 2 October, have put Saudi Arabia firmly in the spotlight. And it’s at a bad time too, as the kingdom is set to host an upcoming investment conference in Riyadh.

A number of high-profile attendees are pulling out, with IMF managing director Christine Lagarde the latest to say she won’t be going. But BAE Systems (LSE: BA) confirmed to the BBC on Wednesday that it will be attending. Do shareholders need to worry about any possible fall-out from the Khashoggi situation?

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Big business

There’s no question that Saudi Arabia is extremely important to BAE, especially as UK defence spending has been contracting. A sixth of its sales last year were to the country, and it has 6,000 employees there.

Rolls-Royce Holding (LSE: RR) also has a lot at stake in Saudi Arabia, with its half-year results speaking of further aircraft sales. And the company has significant contracts for the maintenance of engines used by the Saudi air force. In fact, Rolls-Royce’s profits are really geared towards long-term service contracts, which I see as a point in its favour.

But when it comes to the moral aspects of politics and business (which isn’t really a very big book), profit comes first. US President Donald Trump has already made it clear he’s keen not to damage US companies’ business prospects in Saudi Arabia.

Jobs first

The UK government is surely not going to want to be seen doing anything to hurt the thousands of highly skilled jobs the two companies provide — together they employ around 60,000 people in the UK. And there will certainly be no appetite to see the business going to other countries.

The old “If we don’t sell it to them, someone else will” line has always seemed to be somewhat morally lacking to me, but then it’s really only a thinly-disguised economic argument, and a way of justifying going for the cash.

And that’s the bottom line — as long as the Saudi regime has the cash, arms sales will be business-as-usual, no matter how repugnant the country’s behaviour.

Keep calm

I don’t think BAE and Rolls shareholders have much to worry about over this latest controversy.

Despite a weak spell in 2017 and 2018, the BAE share price is up 25% over the past five years, and it’s been paying solid and well-covered dividends of around the 4% mark for the past few years. I see BAE as a solid long-term income investment.

Rolls-Royce is trickier to value, as its relatively depressed profits just as it emerges from a couple of years of slump make traditional valuation metrics rather meaningless. But the recovery does seem to be going well after first-half results showed significant progress. And I’m sticking with my long-term positive feeling towards the company.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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