The Motley Fool

I’d sell this stock to buy the BAE share price today

Image source: Getty Images.

I don’t like seeing a British engineering firm suffering, but that’s what’s been happening at Senior (LSE: SNR), whose share price is down 35% over the past five years.

A 12% drop early Thursday morning didn’t help, on the back of a trading statement that was less buoyant than at the interim stage

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...

Despite 2019 performance set to be “broadly in line with our expectations,” according to chief executive David Squires, there was unexpected news that “in recognition of the challenges in some of our Flexonics and Aerospace markets, Senior is implementing a restructuring programme to drive improved returns.”

Restructuring

The restructuring is going to include job losses, cost-cutting, moving “major work packages” to cheap-labour Asian countries, and closing the firm’s South Carolina aerospace facility by early 2020. The new strategy, dubbed ‘Prune to grow’, is set to incur a restructuring charge of around £20m, with £6m in cash costs expected to show up in the 2019 books.

With this happening, and the firm already well into the disposal of non-core businesses, is it a good time to invest? I don’t think so. Despite the share price slump, we’re still looking at a P/E of around 12. That’s not high, but it’s not low enough to attract me to a company facing Senior’s difficulties.

The fact that cutting costs has become a priority also makes me cautious over the forecast 4.2% dividend yield. Although it would be twice covered, should a company facing a costs squeeze be paying out so much? Especially when it was shouldering net debt of £268m at the end of the first half?

My pick

I’d be going for BAE Systems (LSE: BA) instead, which also released a trading update Thursday.

BAE shares are up 27% over the past five years, but as the price has retrenched a little from a peak in July 2018, we’re looking at P/E multiples of around 12 to 13. That’s close to Senior’s valuation, but without the apparent need to prune to grow. The past six months of the current year have seen BAE shares starting to pick up again, forecasts are strengthening, and the company now says it expects underlying EPS to “grow by mid-single-digit percent.”

There’s a dividend yield of 4% on the cards, and we’re seeing the annual payment comfortably keeping up with inflation. If current forecasts come good we’ll have seen 12.5% dividend growth over five years, and that adds up to a very satisfactory overall return.

Dividend safe

BAE says it “continues to target in excess of £3bn of free cash flow over the three-year period 2019-2021, and expects 2019 net debt to be broadly unchanged from the net debt at 31 December 2018.”

At that stage, the debt figure stood at £904m, which looks like a very significant sum on the face of it. But it’s less than half the firm’s 2018 underlying EBITDA, which is a very respectable comparative. Coupled with such strong cash generation, I really don’t see any pressure on the dividend.

BAE’s dividend policy is one of “long-term sustainable cover of around two times underlying earnings and to make accelerated returns of capital to shareholders when the balance sheet allows.” I see that as both conservative and attractive, and BAE is a buy for me.

“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!

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.

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.