While the investing world frets about the impact of a tariff war on asset prices, some FTSE 100 shares just keep moving higher. BAE Systems (LSE: BA) is one example.
Incredible gain
Perhaps this isn’t much of a surprise. The UK defence juggernaut was always likely to be in favour after European nations and the UK came together to declare their support for Ukraine following the disastrous meeting between Presidents Trump and Zelenskyy at the White House.
Nevertheless, I think even the most bullish of holders will be delighted by just how well things have panned out. I say this purely from an investment perspective, of course.
As I type, BAE Systems stock has recorded a 31% gain in the last month. Put another way, a £10,000 stake in the company only a few weeks ago is now worth £13,100. That’s the sort of price rise one might see from a blue-sky penny stock!
In case you hadn’t guessed, this return also greatly exceeds that of the major indexes. The FTSE 100 itself has fallen 2% over the same period. The S&P 500, with all its tech titans, has dropped over 7%.
More to come?
There’s an argument that things could get even better for investors.
Regardless of whether a peace deal were struck between Ukraine and Russia, defence spending looks like it’s only going in one direction. European leaders are likely sceptical that President Putin will stick to any terms. There’s also a sense that ties with Trump are now so stretched that our collective reliance on the US for military support has come to an end. As a major player in the space, this could provide another boost to the BAE Systems share price.
That said, there are a few things worth noting.
All priced in?
First, the stock now trades at a forecast price-to-earnings (P/E) ratio of 21. That’s more than the mid-teens average valuation of FTSE 100 firms. It’s also higher than the the company’s average P/E over the last five years (16). I actually remember the very same stock changing hands for less than 10 times earnings a little further back.
So, it seems a lot of good news is already priced in. That could bring out a few profit-takers if expectations are found to have exceeded reality when the company releases news on earnings.
One should also consider the possibility that some of BAE’s biggest customers — such as the aforementioned US — may reduce spending going forward or choose to only deal with home-grown contractors.
Dividend king
Predicting exactly where share prices will go in the next few days or months is a fool’s errand. So, let me leave you with one fact that’s probably been overlooked amid all this focus on the share price: BAE Systems has been and remains a brilliant source of rising dividends.
Sure, any income from the stock market can never be guaranteed. But if it can nab just a portion of the multi-billion pound contracts being mooted by analysts, I’m struggling to see why this form won’t continue. That should provide some compensation to holders if the shares were to (temporarily) give up some of their recent gains.
Consequently, I still think BAE Systems is worthy of consideration as part of a diversified portfolio.
