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BAE Systems (LSE:BA) shares have done well recently. Over 12 months, they’ve risen around 40% meaning that if I’d invested £1,000 a year ago, I’d now have roughly £1,400 (plus dividends).
I’ve owned BAE Systems shares in the past, but don’t own them at present. Are they worth buying for my portfolio today? Let’s take a look.
BAE Systems shares: worth buying?
I can certainly see the appeal of owning BAE today. Given the Russia-Ukraine situation, as well as the tensions between China and Taiwan, I can’t see governments dramatically reducing their defence spending any time soon. So, the backdrop for the company – which is a major defence contractor to the US, UK, and Saudi governments – should be quite supportive in the years ahead.
“We see further opportunities to enhance the medium- and long-term outlook as our customers commit to increased defence spending to address the elevated threat environment,” said CEO Charles Woodburn in the company’s recent H1 results.
Looking at analysts’ forecasts, BAE is currently expected to generate sales and earnings per share (EPS) of £22.5bn and 52.5p respectively for 2022. To put these numbers in context, sales last year were £21.3bn while EPS were 47.8p. So, near-term growth looks healthy.
This is encouraging in the current macro environment, in which a lot of more cyclical companies are seeing sales growth decline.
3.3% dividend yield
Another appeal of BAE Systems shares is the dividend. For 2022, analysts expect the company to pay out 26.3p per share. At the current share price, that equates to a yield of about 3.4%. It’s worth noting that dividend coverage is strong, meaning there’s a low chance of a dividend cut in the near term.
Additionally, the company is buying back its own shares. In the H1 results, the group announced a new £1.5bn buyback. This should support EPS over time, making the stock more attractive from a valuation perspective.
Speaking of valuation, at the current share price of 786p, BAE has a forward-looking price-to-earnings (P/E) ratio of about 15.
Is there value at that multiple? Well, I wouldn’t say it’s a high valuation. But it’s probably not a bargain one either. I wouldn’t expect to see much of an upward valuation re-rating going forward.
So, I’d expect returns going forward to be in line with earnings growth and dividends. In other words, I’d expect solid, but not spectacular, returns from here.
As for the risks, one that’s worth highlighting is the debt on the balance sheet. At 30 June, the company had long-term loans of £5.1bn on its books. This is something to keep an eye on in the current rising-interest-rate environment, in which debt is becoming more expensive to service.
Another potential risk is a pullback in the share price if the Russia-Ukraine crisis comes to a sudden and hoped-for end. This could impact sentiment towards defence stocks in the short term.
Should I invest in BAE Systems?
Putting this all together, I’d be comfortable buying BAE Systems for my portfolio today. I think it could play a valuable role in my portfolio as a defensive dividend stock.
Having said that, I think there are a lot of other stocks that could provide higher returns over the long term. So, I wouldn’t want a huge position.