The BAE Systems (LSE: BA) share price has risen 47% in 2022. Based on its dividend forecast for this year the defence stock now carries a 3.3% forward dividend yield.
Things get better for 2023. For next year, the company’s dividend yield rises to 3.5%. However, both of these figures both fall short of the Footsie average of 4.1% by a decent margin.
But should I still buy BAE Systems for dividend growth? Here I’ll explain whether I think it’s a top stock for me to boost my passive income.
Solid dividend forecasts
First it’s worth looking at the robustness of BAE Systems’ dividend forecast for the next two years.
City analysts think the FTSE 100 firm will raise 2021’s full-year dividend of 25.1p per share to 26.5p this year and to 28.5p in 2023.
The good news is that predicted dividends are well covered too. Earnings per share of 52.6p and 57.8p are anticipated for 2022 and 2023, respectively.
This gives BAE Systems dividend coverage of two times. A figure of this or above provides investors with a wide margin of safety.
Strong capital generation gives the company extra firepower with which to meet current dividend forecasts. The business has guided for free cash flow of more than £1bn in 2022, and cumulative cash flow above £4bn between 2022 and 2024.
Budget uncertainty
So it looks in good shape for solid near-term dividend growth. But can it grow the annual payout reliably and at a healthy rate beyond then?
There’s some uncertainty on future earnings given the mounting pressure on Britain’s finances. Weapons demand from this key customer could disappoint if defence budgets are stripped back.
On Wednesday, Liz Truss affirmed government plans to spend 3% of domestic GDP on defence by 2030. This is up from around 2% at present.
But her subsequent resignation as prime minister has cast a shadow over these plans. A new leader could easily throw this key Truss pledge onto the fire.
Defence spending rises
That said, it’s my belief that defence spending in the UK and the US will likely grow from current levels. The deteriorating geopolitical situation means that governments will may take money from elsewhere to bolster arms expenditure.
During 2021, global defence spending burst through the $2trn marker for the first time. The US, UK, Russia and China were four of the five biggest spenders last year. And the arms race between these military superpowers looks set to intensify following the invasion of Ukraine.
In the sweet spot
BAE Systems’ strong relationships with the Pentagon and Ministry of Defence mean it could witness a surge in product orders. So does its expertise in areas like boatbuilding and fighter jet design. Modernising Western navies will be an area of intense focus over the next decade.
It’s true that it doesn’t offer the biggest dividend yields. But I believe the business — helped by the stable nature of its operations — is in great shape to reliably grow dividends over the long term. This is why I’d buy it to boost my own passive income if I had the cash to spare.