I’ve long talked up the appeal of BAE Systems (LSE: BA) for those seeking reliable dividend growth year after year.
Put simply, humans have never been able to co-exist without conflict, boosting the coffers of the world’s leading weapons makers. And right now it could be argued that, with ‘Cold War 2.0’ well and truly up and running following the Salisbury poisonings in the UK, and global acts of terrorism on the rise, the sales outlook for the world’s weapons and security services providers has been stronger than it has been for decades.
In addition, when you consider the increasing amounts that emerging nations are dedicating to defence spending, the outlook for the likes of BAE Systems could be considered better than ever. Indeed, the FTSE 100 company announced this week that conditions for a £5bn agreement to supply 24 Typhoon and Hawk aircraft Qatar Emiri Air Force had finally been met. Deliveries of the planes are set to begin in 2022.
Order, order!
News of a 22% drop in pre-tax profit from January and June, to £571m, at BAE Systems grabbed the headlines back at the start of August, the fall caused by a 7% revenues drop which slid to £8.8bn.
However, news surrounding its order backlog confirmed that the long-term profits picture at the London business remains rosy. The order backlog rose to £39.7bn in the first half versus £38.7bn in the same 2017 period, a figure that excluded the aforementioned Qatar aircraft deal as well as the SEA 5000 programme to supply frigates to Australia. BAE chalked up orders of £9.7bn in the first six months of 2018.
UBS was certainly impressed by the latest set of numbers, the broker advising that “the order intake in the first half of 2018 and the order book… are stronger and broader than ever, underpinning the future growth ahead across activities and various geographies.” It added that “we believe BAE Systems is well leveraged to increasing defence budgets growth in the US, Middle East, Australia and Europe.”
Chunky dividend yields
BAE Systems is anticipated to endure a 3% earnings slip in 2018, reflecting execution problems at its Platforms & Services (US) and Maritime divisions more recently. The firm is expected to bounce back starting with a 9% bottom line rise next year though, underlying the strength of its order book.
This anticipated recovery gives City analysts the confidence to predict further dividend growth through to the end of 2019 too. 2017’s 21.8p per share payout is predicted to rise to 22.7p in the present period and again to 23.7p next year, figures that result in chubby yields of 3.6% and 3.8% respectively.
At current share prices, BAE Systems boasts a forward P/E ratio of 14.8 times. This suggests that the firm is significantly undervalued, not just from a conventional viewpoint (this earnings multiple falls just inside the accepted value territory of 15 times or below), but also the probability of decent profits — and thus dividend — expansion for many years to come. I think it’s a hot share to buy now and hold for the decades ahead.