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Why I’d buy the BAE share price for a dependable income stream today

BAE Systems (LSE: BA) released its 2019 figures on Thursday, and confirmed what I’ve always thought. It is one of the most dependable generators of income out there.

The annual dividend was raised by 4.5%, to 23.2p per share. It’s now up 11% in four years, since 2015’s payment of 20.9p. In times when inflation is running at under 2%, that’s a very attractive real-terms gain. It’s not massive, but reinvesting real-terms profits over decades can generate serious wealth.

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The dividend yield is falling back a little, but that’s for a very good reason — the share price has been gaining. Over the past 12 months, BAE shares are up 43%. And though that’s knocked the forecast 2020 yield back to 3.6%, that’s a cracking total return.

Volatility

But before you go rushing off to buy shares in this potential growth and dividend stock, a word of caution. The BAE Systems share price can be very erratic. The past year has been special, but the gain has really just marked a recovery from a price crash in 2018. Over five years, BAE shares are up a relatively modest 25%.

The aerospace and defence business is a fickle one, and I really don’t think it’s one for short-term investors. So if you’re thinking of investing in BAE, I think you need a planned horizon of at least a decade. To be fair, I actually think that of investing in shares generally, but I see it as especially important with such a potentially volatile stock.

Modest debt

My main area of concern with so many otherwise attractive companies is debt. So what’s BAE’s situation looking like? It ended the year with net debt of £743m, and that’s only 0.35 times underlying EBITDA of £2,117m. Debt at such a relatively low level is really not a problem.

But things are compounded by BAE’s pension fund deficit, which stood at £1.9bn at 31 October. That’s nowhere near the scary levels that the BT pension fund deficit has reached, exceeding £11bn at the last count, but it’s not trivial. BAE had a deficit recovery plan in action that was to run to 2026, but it’s now decided to take a more aggressive approach.

A bit more debt

There’s to be a one-off payment of £1bn made in the coming months, funded by debt, with £240m and £250m extra available for the next two scheme years respectively. Some might not like the idea of this extra debt, but I think it’s a good move. For one thing, I see it as a solid ethical step to take, which should help reassure existing and future beneficiaries of the scheme.

And BAE can afford to take on the extra debt. Other things being equal, the extra billion would ramp net debt up to £1,743m. That’s still only 0.82 times underlying EBITDA, and most firms would shrug off anything less than 1.5 times as perfectly acceptable. It also combines debt and debt-like liabilities into a higher-profile item that shareholders can monitor more accurately, and I do like openness.

In all, the week’s news has reaffirmed my buy stance on BAE Systems.

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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.