Holders of FTSE 100 defense, aerospace and security titan BAE Systems (LSE: BA) enjoyed a storming 2016, thanks in no small part to the seismic political and economic events that occurred along the way.
A flight to relative safety by investors following the EU referendum result, the subsequent slump in sterling and Donald Trump’s election victory and protectionist stance combined to leave shares in the £19bn cap trading at all-time highs.
Can this sort of performance continue and if so, could investing in BAE actually increase your chances of retiring early? Let’s delve into today’s full-year results.
Solid growth
With regard to the first question, the signs are certainly encouraging. In 2016, underlying earnings before interest, tax and amortisation increased to just over 1.9bn with underlying earnings per share coming in 7% higher than in 2015, in line with previous guidance. Operating business cash flow also rose by 47% (£323m) to just over £1bn.
Thanks to contract wins in the UK and US, BAE’s order book is looking increasing healthy with intake rising by £7.5bn to £22.4bn and backlog increasing £5.2bn to £42bn.
Commenting on results, outgoing CEO Ian King reflected that the company’s “long-term programme positions, strong programme execution” and “well-balanced portfolio” — combined with improved defence spending — meant that the company was well placed to continue making money for shareholders.
The market seems inclined to agree. Shares in BAE are up 2.2% this morning.
Still a buy?
BAE’s dominant position in the defence sector, coupled with its geographical diversification and growing presence in areas such as cybersecurity lead me to suspect this really is a share to buy and hold for decades rather than months.
Of course, the pleasing rise in the share price over the last year has the drawback that the company is now more expensive to buy that it used to be. Go back five years and the stock was trading around nine or 10 times earnings. For 2017, BAE is on a price-to-earnings (P/E) ratio of 14. Given that underlying earnings per share are expected to continue rising in the next year (by 5% to 10%) however, I still think this represents decent value.
The negative correlation between share prices and dividend yields also means that the latter isn’t quite as enticing as it once was. That said, with savings in bank accounts earning pitiful rates of interest at the current time, a yield of around 3.6% for 2017 still looks rather attractive, even if the rate of growth in the company’s bi-annual payouts is slow.
Unfortunately, BAE is not devoid of problems. Its staggeringly large pension deficit may put off some investors, especially if the company is required to reduce its capital expenditure to plug the gap.
In addition to this, investors should also be aware that BAE’s enormous size makes it very hard for the company to charge ahead in terms of valuation. If you’re looking to make rapid capital gains, you may be better off looking to one of its smaller peers who are more capable of growing revenue and earnings at a faster clip.
Bottom Line?
BAE Systems won’t make you rich overnight or single-handedly bring forward your retirement date. But as part of a fully diversified portfolio, I think the shares certainly warrant further investigation as long as the aforementioned pension deficit is tackled sooner rather than later.
