The Motley Fool

Why I think now could be the time to buy this unloved FTSE 100 dividend growth stock

Image source: Getty Images.

For Footsie investors, BAE Systems (LSE: BA) continues to be something of a turn-off. It’s understandable why this is so. The defence behemoth’s share price has taken an almighty whack since the murder of Saudi Arabian journalist Jamal Khashoggi in October, and the subsequent concerns over sales restrictions to the country’s military forces.

I’ve laid out my opinion that BAE Systems is unlikely to suffer as a result of the political fallout, but full-year results released last month sent a chill down many an investor’s spine and prompted a subsequent fall in the firm’s share price. In the release, the firm chillingly warned that the “current German government position on export licensing may affect the Group’s ability to provide capability to Saudi Arabia which may have a consequential impact on [its] financial performance and relationships.”

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Germany takes the lead

Being a major contributor to the Eurofighter Typhoon project, Germany’s decision to stop exports to the Middle Eastern state threatens supply of this aircraft in the years ahead, a major profits generator for BAE Systems via hardware sales, as well as through subsequent service revenues. Total turnover at the business slipped £100m in 2018 to £18.4bn because of lower production of the aircraft, illustrating the importance of the programme on the company’s bottom line.

Saudi Arabia remains locked in negotiations to take more 48 of the jets, but Germany is yet to loosen its embargo. Indeed, the extension of the export ban in early March to the end of the month, as Berlin considers the Khashoggi killing as well as the House of Saud’s role in the Yemen civil war, shows that the issue is far from being satisfactorily resolved for the arms-makers.

Cheap price, big yields

That said, could now be a great time to pile into BAE Systems. Its low rating (a forward P/E ratio of 10.9 times) arguably bakes in the possibility of a painful ban on exports to Saudi. I would go one step further and suggest that this cheap multiple could spark a share price surge in the days or weeks ahead.

Why? Well the pressure is mounting on all sides for the German government to revoke its export ban. Not only from the corridors of power in France and Britain (those other contributors to the Typhoon programme fearing a collapse in aircraft revenues in the years ahead), but from major influencers at home as well.

Düsseldorf-based arms contractor Rheinmettal has led industry calls for restrictions to end, and even suggested that it could sue the government for loss of revenues. On top of this, new leader of the Christian Democrats Annegret Kramp-Karrenbauer has called on the party’s coalition partners, the Social Democrats, to lift the ban, citing the devastating impact that this could have on jobs in the years ahead. German politicians won’t want to be seen jeopardising German jobs at a time when the domestic economy is showing signs of increased stress.

Clearly BAE Systems isn’t without risk, but I believe the concerns over future Typhoon sales are reflected in the current share price. If you’re looking for an attractive contrarian stock to buy today I think this Footsie firm is worth serious attention, and particularly for income hunters — yields for this year and next currently sit at a chubby 4.8% and 5% respectively.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Royston Wild 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.