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The BAE Systems share price is up on £30bn sales spike. Is it my next SIPP star?

Tom Rodgers — Wed, 15 Nov 2023 15:03:45 +0000

The BAE Systems (LSE:BA.) share price is one of the biggest FTSE 100 gainers this year, and for good reason.

Results out this week show the UK defence giant is on track for a big uplift in annual profits. Countries continue to increase military orders with Russia’s war in Ukraine, and the recent conflict in Gaza.

The company manufactures fighter jets and submarines, among other large military equipment and machinery. It said it had logged £10bn of orders since the end of June 2023. That puts the group on track for more than £30bn in sales orders this year.

War footing

Last month I wrote how I picked up shares in Qinetiq Group. That’s one of the UK’s fastest-growing defence companies. Now I see potentially more value in its biggest rival.

And we’ve heard how the company’s business pipeline is booming. BAE Systems strategy director Steve Cardew told the market in August that global conflicts had spiked sales. Especially with the Russian invasion of Ukraine.

In July 2023 it signed a £280m weapons deal with the UK government. In September it boosted that supply with another £130m contract.

Shortly after, the US, UK and Australian governments announced they would spend £3.95bn on a new generation of submarines built by BAE Systems. These nuclear-powered subs are to back up a pact to counter China’s ambitions in the South Pacific.

That has led to BAE upgrading its guidance. Earnings per share will jump 10% to 12% in 2023, said chief exec Charles Woodburn.

24 years of dividend hikes

BAE shares come with a 25% higher price tag than at the turn of 2023. Quite the move for a £32bn company. And certainly for one of the world’s largest defence, aerospace and weapons manufacturers.

The thing that really gets me interested here is long-term value. When seeking compound growth — the eighth wonder of the world — consistency is key.

And BAE Systems has an incredible track record. Since this would be a long-term income stock for my SIPP, I like one specific fact. The company has improved its dividend per share every year since 1999.

Ignoring BAE Systems because it has repriced higher? That’s effectively saying I wouldn’t buy a company that is becoming more popular, and growing its revenue, profits and dividends.

What I’d pay

The downside, of course, of all this attention, is that shares are now trading at 16 times earnings — a healthy premium. But I see safety in numbers. Especially with the way the world is leaning these days.

If I’d have bought £10,000 worth of BAE shares in 2007 (£4.29 a share, 2331 shares), I’d have collected a modest 12.8p per share in dividends, worth £298.

That same £10,000 invested in 2022 would be worth £452.26 in dividends! Quite the uplift.

This, of course, doesn’t include the gain I’d have had from simply buying the stock 16 years ago and reinvesting dividends. By my calculations, if I’d have done that, my initial £10,000 of BAE shares would now be worth a tidy £50,403.67. So I can see the power of compounding, and time in the market.

I’ll leave the intraday trades and risky leveraged punts to others. I’ll stick to Britain’s best businesses for my long-term SIPP retirement stocks.

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Tom Rodgers has positions in QinetiQ Group Plc. The Motley Fool UK has recommended BAE Systems and QinetiQ Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I just bought this FTSE 250 defence star as war breaks out

Tom Rodgers — Fri, 20 Oct 2023 14:47:00 +0000

With investors rushing to buy UK defence stocks, one FTSE 250 growth star stands out to me.

I just bought Qinetiq (LSE:QQ) for my SIPP as a long-term compounder.

Qinetiq paid £43m to shareholders in 2022/23. The dividend per share is double what it was a decade ago. But there’s more.

BAE the best?

BAE Systems is one of the biggest stock market gainers from the West’s move to aid Ukraine with military support. It’s Britain’s largest defence company, after all.

It remains the UK’s most-searched for stock in 2023, according to Google Trends.

But with so many investors throwing their cash into BAE shares, I see the £10+ per share price as too high. Now I’d have to pay 17 times annual earnings for BAE.

Instead, my eyes alighted on a company a fraction of the size. QinetiQ is a £1.8bn market-cap defence specialist with £1.6bn in revenue. It has a solid and growing dividend, and humming net profits.

A Common Wealth report cited by The Guardian found Qinetiq pays just 4.5% of its own research and development costs. The rest is shouldered by increasing UK government support for aerospace and defence companies.

That’s led to a chunky 23.2% return on investor capital, reporters wrote.

Breakups are tough

So what are the major risks? A takeover or buyout seems most likely to top that list. Those deals don’t always work out best for the private investor.

In 2019, the UK government waved through the £4bn sale of British aerospace firm Cobham to a private equity giant.

Two years later, AIM-listed TP Group was taken out by Science Group for a song. The US engineering giant Parker-Hannifin Corp snapped up the £1.6bn-a-year revenue Meggitt in 2022.

That cleared out some of the largest UK rivals to Qinetiq. But defence is a global industry with massive players.

Where the upside lies

Qinetiq is a multinational with divisions in the Middle East, Australia, and the US.

Chief executive Steve Wadey said on 12 September that the war in Ukraine led to growing interest in its key technologies. These include using laser energy to target airborne threats.

The Ministry of Defence (MoD) also noted something very interesting last year: “QinetiQ…have built a phase-combined laser with the ability in the future to scale fire-power levels”.

Intellectual property and patents are critical to defence companies’ ability to turn potential into profit.

Qinetiq says its dividends will rise from today’s 7.7p per share to 8.59p by 2025.

The company’s inconsistency in upping these payouts may have dampened enthusiasm in the past. But I see a change in strategy here.

It is one of only three firms invited by the MoD to Porton Down in November last year. There it took part in the UK’s first high powered long-range laser weapons trial.

Defence stocks will be critical to managing the uncertain world ahead. I spy a long-term growth and dividend opportunity here, and that’s why I bought Qinetiq.

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2 excellent FTSE 100 stocks to buy in November

Stuart Blair — Mon, 01 Nov 2021 12:33:33 +0000

Last November, the FTSE 100 soared due to news of Covid vaccines. Currently, the FTSE 100 is at its post-pandemic high, and I don’t expect another big rise this month. But there are still several FTSE 100 stocks I feel have a large amount of value. Here are two that I’m particularly tempted by.

The defence specialist

The BAE Systems (LSE: BA) share price has had a good 2021, rising around 12% year-to-date and 34% in a year. Even so, the past few weeks have been less positive, with the stock falling back around 7% over the last week alone. This was partly because it went ex-dividend, and also due to some investors deciding to bank profits after its strong run. So I think this dip offers a good time to buy. Here’s why.

Firstly, the company continues to win contracts, especially in the US. Most recently, this included a $478m contract for systems engineering and integration services for the US Navy. It also received a $26m contract to equip some US Navy frigates with naval guns. BAE’s ability to win these important contracts is a demonstration of its market-leading position. Hopefully, it will also enable it to increase its profits over the next few years.

In the recent half-year trading update, the firm’s performance was also positive. Indeed, underlying EBIT, which is a key measure of profitability, was able to climb to more than £1bn, over 20% up from the same period last year. Underlying EPS was also able to rise 25% from last year, reaching around 22p. This puts the stock on a price-to-earnings ratio of around 12, lower than a large majority of other FTSE 100 stocks.

Therefore, I feel that the BAE share price is undervalued, despite the challenges that it faces. This includes the fact that defence budgets are rising at slower rates than inflation, which could hinder profits. As such, I’m willing to overlook this risk, and may buy more shares for my portfolio soon.

A FTSE 100 stock with significant presence in Asia

The luxury fashion market has struggled over the past couple of months due to fears that Chinese growth is slowing and that it is looking to “regulate excessively high incomes”. This has caused the Burberry (LSE: BRBY) share price to fall around 7% in recent months (although it’s up 40% in a year). But while worry around China is a risk, especially because Burberry has a very large presence in Asia Pacific, I still believe that Burberry has a ton of potential.

For one, I’m excited about the company’s new CEO, Jonathan Akeroyd, who will take over from Marco Gobbetti next year. While Gobbetti made his mark at the company, I believe that a new CEO will be beneficial. Akeroyd also has experience as the boss of both Versace and Alexander McQueen, two fashion houses with significant prestige. Such an excellent CV should hold him in good stead for the role.

Further, Burberry has recovered well from the pandemic, and first quarter revenues were 86% higher than in the same period last year. I hope it can continue to build on this recovery in its interim results this month. Therefore, this is another FTSE 100 stock I’d happily buy for my portfolio.

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Stuart Blair owns shares in BAE Systems. The Motley Fool UK has recommended Burberry. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

2 ‘no-brainer’ FTSE 100 stocks I’d buy on the dip

Stuart Blair — Wed, 22 Sep 2021 09:24:10 +0000

After hitting post-pandemic highs in August this year, the FTSE 100 has corrected slightly in recent days. This has seen it fall to around 7,000 points. But I feel that this slight correction gives me the opportunity to pick some FTSE 100 stocks on the cheap. Here are two companies I’m particularly interested in buying more of right now.

Packaging company

Over the past month, Mondi (LSE: MNDI) has fallen around 10%, currently priced at 1,880p. But I think this is a great time to buy the packaging company on the dip. Here’s why.

Firstly, the company’s half-year trading update was positive. In fact, it reported revenues of over €3.6bn, an increase of 5% from the same period last year. It also generated operating profits of €503m, which although marginally lower than the same period last year, represents a strong performance.

This good performance also enabled the company to declare an interim dividend of 20 cents, an increase of over 5% from last year. As such, Mondi has a full-year dividend yield of nearly 3%. Although this is by no means incredible in comparison to other FTSE 100 stocks, it’s still an appealing aspect of the company.

Furthermore, the dividend is extremely sustainable, and covered over two times by earnings. This allows plenty of money for investment, and Mondi is doing just that. This has included a €125m investment into its mill in Kuopio, which will increase its capacity by 55,000 tonnes per annum. It’s said that this has been done to “meet growing consumer demand”. As such, I feel that profits will be able to increase over the next few years.

As such, even though rising input costs and planned maintenance factory closures are headwinds moving forwards, I think the outlook remains positive. That’s why I may add more Mondi shares to my portfolio.

A defensive FTSE 100 stock

BAE Systems (LSE: BA) is the other FTSE 100 stock I think is a ’no-brainer’ buy. The defence specialist has proved extremely resilient during the pandemic, and while other companies recorded huge losses last year, BAE was able to see its operating profits rise 2% in the period.

The company’s strong performance has continued this year. In fact, in its half-year results, operating profits were 60% higher than the same period last year at £1.3bn. As such, operating profits for 2021 are expected to be far higher than last year. Underlying EBIT, a key measure of profitability, is also expected to increase around 7%. This has enabled the firm to increase the dividend by 5%, giving it a strong yield of 4.5%. It has also initiated a share buyback programme of up to £500m.

Accordingly, I feel like BAE can overcome the challenges that it faces, namely the fact the US defence budget increased just 1.6% this year, far lower than inflation. A price-to-earnings ratio of around 12 also shows that the firm is not overpriced, especially as it’s not currently seeing falling profits. Therefore, this is another FTSE 100 stock that I may add more of to my portfolio.

The post 2 ‘no-brainer’ FTSE 100 stocks I’d buy on the dip appeared first on The Twelfth Magpie.

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Stuart Blair owns shares in BAE Systems and Mondi. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.