In my opinion, few investments offer the same kind of long-term potential as the BAE (LSE: BA) share price.
The company benefits from several unique qualities of the defence industry. These could help it produce sustainable profits and high total returns for investors for many decades to come.
BAE share price tailwinds
The defence industry is highly regulated and controlled. It’s also very specialised. Companies need a licence to set up as a weapons manufacturer. They also need a lot of initial capital and, perhaps more importantly, they need unique products. Developing these products can be incredibly expensive. For example, the F-35, the Western world’s most advanced fighter jet, cost over $1trn to develop.
Private enterprises cannot fund these projects by themselves, so they rely on government assistance. This means projects are only available to approved suppliers, and suppliers who already have a relationship with policymakers.
BAE has the advantage here. The company’s most important shareholder is the UK government. The government only owns one share, worth £1, but this so-called Golden Share gives the state almost complete control over the future of the business.
This is just one of the competitive advantages that have led me to BAE shares. The business also has access to extremely valuable tech knowhow and highly developed supply chains.
On top of these competitive advantages, the company has a large degree of revenue visibility. Contracts for defence equipment usually run for many years, and in some cases, decades. This gives the group the sort of income stability other firms can only dream of, which can certainly help the BAE share price.
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Based on the reasons above, I think the share is an attractive long-term investment. And now could be the perfect time to buy it, while the stock trades at a depressed level.
Indeed, right now, shares in the defence contractor are changing hands at a forward price-to-earnings (P/E) multiple of 12. That’s compared to the long-term average of around 15.
I think the company’s dividend yield is even more attractive. The stock currently supports a dividend yield of 4.6%. For the reasons outlined above, I believe this is one of the most secure dividends in the FTSE 100. Even though BAE paused the payout earlier in the year due to the uncertainty caused by the coronavirus pandemic, it was one of the first blue-chip businesses to restart its distribution to shareholders.
The company’s long-term contracts with financially secure counterparties (such as the UK government) support this distribution and suggest that the business is unlikely to have to reduce the payout materially in the medium term. The BAE share price also has a strong track record of dividend growth. The payout has grown at a compound annual rate of 2.5% since 2014.
Overall, I believe this company could be a great addition to my portfolio in 2021.
