Why I think the BAE share price is a top FTSE 100 buy right now

G A Chester discusses the investment appeal of FTSE 100 (INDEXFTSE:UKX) defence giant BAE Systems plc (LON:BA).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I think there’s space in a diversified portfolio for some carefully selected high-growth stocks and deep-value plays. However, when it comes to core holdings, I prize steady businesses above all others.

Typically, these stocks are in sectors that aren’t too dependent on the broad economic cycle. They also tend to have decent, rather than spectacular, earnings growth, and pay a reasonable, rather than extravagant, dividend. Rarely the most expensive in the market and rarely the cheapest, I think of them as ‘Goldilocks’ stocks.

One such stock I rate a great buy right now is FTSE 100 defence giant BAE Systems (LSE: BA).

Happy days

BAE Systems made sales of £18.4bn in 2018, with the US (42%) and UK (21%) being its largest markets. Having seen a record order intake, it ended the year with an order backlog of £48.4bn, giving management “visibility on many of our key programmes through the next decade.”

A trading update last month was encouraging for the key markets of the US, with continuing “positive momentum in funding for military readiness and modernisation,” and the UK where it said “Defence and Security remains a priority for the UK government.”

Arabian nights

Given all the above positives, you may be wondering why BAE’s shares are trading at sub-500p versus a 52-week high of over 675p. Part of the reason is that Germany placed a temporary ban on exports of arms to Saudi Arabia after the murder of dissident journalist Jamal Kashoggi, with potential knock-on effects for BAE. Saudi Arabia accounted for 14% of the UK group’s sales last year.

However, Germany has partially lifted restrictions, under pressure from other European governments, including the UK and France. And BAE said in last month’s trading update it’s “working closely with industry partners and the UK government to continue to fulfil our contractual support arrangements in Saudi Arabia on the key European collaboration programmes.”

Pragmatism

My Foolish colleague Edward Sheldon named BAE as his top stock for June at the start of this month, and I agree with his view that investors’ fears in relation to the Saudi issue may be overblown. Economics tends ultimately to trump moral outrage in these kinds of situation, and I expect pragmatism to prevail.

On this basis, I believe BAE’s depressed share price represents a great opportunity for investors to buy into a ‘Goldilocks’ stock that I rate among the best of this ilk in the FTSE 100.

Strength and reliability

Buyers of the shares today at 493p are paying 11 times forecast current-year earnings of 45p a share. This is significantly cheaper than the historical average for the stock. Meanwhile, a well-covered forecast 23p dividend, gives a prospective starting yield of 4.7%. Again, this compares favourably with its long-term average.

BAE’s dividend history is testament to the strength and reliability of its business. With the exception of 2003 when the board maintained the dividend at the same level as 2002, the company has increased the payout every year since the turn of the century.

It’s a great stock for steady growth and income, in my opinion, and is trading at what I consider a bargain price today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester 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.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »