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The BAE share price is gaining, but I’d still buy the stock

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According to Credit Suisse research, the global number of millionaires rose during 2020 pandemic. At least some of those will have profited from investing during the stock market crash. And while I didn’t make it to millionaire status, I felt a bit like a child in a sweetshop, faced with so many tempting buys.

One of them is BAE Systems (LSE: BAE). The BAE share price has been gaining in 2021, so am I too late?

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I haven’t bought BAE shares because there are more buys out there than I have money for. But BAE Systems is still on my buy list, and I want to explain why.

The BAE share price is up 10% so far in 2021, pretty much bang in line with the FTSE 100. It still lags the index over 12 months though, with a 6% rise while the Footsie has done more than double that at close to 14%.

That still doesn’t tell that whole picture, as BAE shares had been on a bull run immediately prior to the coronavirus arrival. And they hit a peak in the days just before the stock market crash struck.

As a result, since mid-February 2020, the BAE share price is still down 16%. That leaves us with forward P/E multiple of only 11. And forecasts for the current year’s dividend suggest a yield of around 4.5%. Prior to the pandemic-induced crash, FTSE 100 dividend yields had been rising year-on-year, though many have taken a backwards step in the past year. But even against that long-term trend, I see BAE’s predicted yield as attractive.

BAE share price valuation

Put together, and considering the low inflation environment we’re still in, those two valuation metrics put BAE stock firmly on my buy list. But why does the market apparently disagree with me, and what might go wrong? As my Motley Fool colleague Royston Wild pointed out, we’re in the throes of a bit of an ethical backlash right now, which might have something to do with it.

Maybe it’s partly due to the climate crisis waking us up to our long-term responsibilities. Maybe it’s a reflection of a growing opposition to industries that cause harm. The ethical issues surrounding tobacco are surely at least partly behind the low share prices of British American Tobacco and Imperial Brands. But does the BAE share price deserve to be depressed alongside those?

A necessary evil?

Carbon emissions are undoubtedly harmful, but there are other ways to produce energy. And as for tobacco, that’s simply not an essential product. But when it comes to the defence industry, I think we’re looking at something fundamentally different. Yes, there are valid concerns around the supply of arms to dodgy governments. But if the defence industry is seen as a modern evil, it’s surely a necessary one.

There may be pressure on reducing arms exports to some of BAE’s customers (Saudi Arabia springs to mind). But I reckon the wider defence industry remains essential. The BAE share price might well suffer a few years of weakness. And it might perpetually remain down in lower P/E valuations.

But I’d buy for the potential years of strong dividends that I see ahead.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco and Imperial Brands. 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.

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