The BAE Systems (LSE: BA) share price has blasted to 18-month highs in recent sessions. Trading during the past year has been bumpy at times (the FTSE 100 firm plunged to its cheapest since 2014 back in October). But it’s up 12% since this time last July as confidence in UK share markets has gradually improved.
Can the BAE share price continue its recent strong performance? And as a long-term investor can I expect it to provide me with strong returns?
Why I’d buy this FTSE 100 share
Here’s why I think BAE Systems could be one of the best FTSE 100 stocks to buy for my portfolio today:
1) It’s an industry leader. The BAE share price leapt this week after it released financials for the six months to June. Progress across all divisions showed underlying sales at group level 6% higher at constant currencies, to £10bn. It also clocked up £10.6bn worth of orders in the period, up from £9.3bn a year earlier. The results underline the strength of BAE Systems’s broad product ranges and thus its strong relationships with Western customers.
2) It’s a cash machine. News of a £500m share buyback and a 5% hike in the interim dividend served to turbocharge the BAE share price too. These steps underlined what a formidable cash generator the FTSE 100 share is. Free cash flow came in at £461m in the first half, compared with a £100m outflow in the same 2020 period, as its recovery clicked through the gears.
3) Defence spending should remain strong. There’s been much speculation about how the economic consequences of Covid-19 could impact the amount governments spend on arms in the short-to-medium term. Personally speaking, I expect demand for BAE Systems’s product to remain strong as the West frets over Chinese and Russian foreign policy. Recent proposals to boost the Pentagon’s budget boosts my belief that arms expenditure will remain robust.
BAE’s share price: too cheap to miss?
There are a few potential obstacles that I as a UK share investor need to remember. BAE Systems’s commercial aerospace operations have taken a whack recently because of Covid-19-related travel restrictions. A long battle to beat the pandemic means that the pressure here could remain intense.
The rising popularity of responsible investing poses a long-term threat to the BAE share price, meanwhile. Many UK share investors believe that defence shares like this FTSE 100 firm help keep citizens safe. But many environmental, social, and corporate governance (or ESG)-focussed funds stay away from arms-builders as their tech can be viewed as highly destructive. This is a theme that could gradually pick up momentum with private and corporate investors alike.
I still believe that BAE Systems has plenty of investment potential, though. And today the BAE share price seems to offer plenty of bang for one’s buck. The FTSE 100 firm trades on an undemanding forward P/E ratio of around 12 times. It sports a market-beating dividend yield of 4.4% too. I’d happily buy this UK share for my own shares portfolio today.
Royston Wild 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.