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Was Neil Woodford right to dump his shares in BAE Systems and should I buy some now?

I last looked at aviation and weapons firm BAE Systems (LSE: BA) in July 2016, noting at the time that well-known fund manager Neil Woodford held a tranche of the firm’s shares in his Equity Income Fund. He’d just released a blog post outlining some of the global economic risks he predicted ahead. I wrote that his conclusion seemed to suggest “there are more important influences on the long-term outlook for the UK economy than the process of Britain disentangling itself from the EU.”

However, Woodford dumped BAE Systems shortly after my article was published, so the stock was not destined to be part of his portfolio through the Brexit process after all. My Foolish colleague G A Chester pointed out the reason for the sale was disarmingly simple. Woodford’s head of investment communications, Mitchell Fraser-Jones, had explained the sale by saying: “Our total return expectation for a stock equals its dividend yield plus the anticipated rate of dividend growth.” In the case of BAE Systems, Woodford simply saw better opportunities elsewhere after he’d done the calculation.

A disappointing performance

It seems like a good time to look again at the company now that the Brexit process is so much further advanced than it was. How has an investment in BA Systems faired over the past two and a half years?

The share price was at 544p in the summer of 2016. Today, it’s close to 517p having jumped up to about 675p a couple of times along the way. But holding through means an investment since July 2016 is down by about 27p via the share price. Meanwhile, dividend income came in at just over 52p, so the total return has been around 25p per share, or about 4.6% over the period. That’s not good. And along the way, there’s been a lot of volatility to contend with, so at first glance Woodford’s ‘sell’ decision looks sound.

Looking forward, the anticipated dividend yield for the 2018 trading year is around 4.3%, and the rate of dividend growth is running at about 2.8%. Adding the two together throws up a figure of 7.1. Would that have been enough to keep Woodford interested if he was still invested? He reportedly targets a figure in high single digits, so I reckon it’s probably borderline and not high enough to get him back into the shares.

Lumpy earnings and a volatile share price

In November, the company said in a trading update that it expects earnings to come in broadly flat for 2018 compared to the year before. But the firm has a history of lumpy earnings and wild swings in the share price. I don’t think the firm’s defence-led business is predictable and its fortunes tend to hinge on budget and strategy decisions made by the US and UK governments, and others. Rather than going for BAE Systems, this is one of those occasions where I’d rather iron out single-company risk by investing in a tracker fund, such as one that follows the fortunes of the FTSE 100.

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Kevin Godbold has no position in any 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.