BAE Systems (LSE: BA) (NASDAQOTH:BAESY) has had a bit of a bumpy ride over the past few years, as far as earnings go at least.
But there’s an 8% rise in earnings per share (EPS) expected by City analysts for the year just ended in December 2013 — and we’ll have full-year results next Thursday, 20 February.
After last year’s 15% drop in EPS, what signs are there to support a return to growth in 2013?
Share repurchase
Well, underlying EPS at the halfway stage, announced in August, actually came in 4% down at 17.8p. But the company did say that “double-digit growth in underlying earnings per share is anticipated for 2013″ — partly due to an aggressive share repurchase programme.
BAE’s Q3 update in October told us that things were still going in line with those expectations and that the full-year outlook was unchanged.
However, there was a note of caution regarding the firm’s Salam contract with Saudi Arabia for the delivery of Typhoon fighters, and pricing negotiations have become extended. By the time of BAE’s update on 19 December, all the firm could say was “Whilst good progress has been made, a definitive agreement has yet to be reached. A timely agreement in the new-year would be reflected in trading for 2013.” Further delay would be expected to impact 2013 EPS by 6 to 7 pence.
Share price slump
What’s BAE’s share price looking like? Over the past five years, it’s lagged the FTSE 100 by some distance, gaining only around 17% to today’s 429p while the index has put on 55%.
That’s echoed in the shares’ valuation — on those 2013 expectations, we’re looking at a price to earnings (P/E) multiple of only 10. That’s way below the FTSE’s current average of 17, and still significantly lagging its long-term average of around 14.
Dividends
And at the same time, BAE is offering pretty decent dividend yields — over the past three years, you’d have had yields of 5–6% per year. And even after the share price recovery of the past 12 months, we’re still likely to see around 4.7% announced next week — the first-half dividend was lifted by 2.6% to 8p per share, with current full-year forecasts representing a rise of 4.2%.
The next three years of dividends should be about twice-covered — and that’s the kind of cover that has allowed BAE to keep its dividends rising regularly, even though its earnings are a little more volatile year-on-year.
Cheap shares
All in all, the results should be positive — and I remain convinced that the shares are too cheap.