Tuesday 17 January 2012

Portfolio Review: BAE Systems (LSE:BA.)

High-yield dividend shares form part of Level 6 of the DIY Income Investor Income Pyramid. As the fortunes of these companies change, so does their eligibility for my portfolio. So it is worth reviewing the portfolio selection, at least annually.

So how is BAE Systems doing?

To quote their website:

"BAE Systems is a global defence and security company with approximately 100,000 employees worldwide. The Company delivers a full range of products and services for air, land and naval forces, as well as advanced electronics, security, information technology solutions and support services.
  • 2nd largest global defence company based on 2010 revenues*
  • Global capability
  • Customers in more than 100 countries
  • 2010 sales of £22.4 billion"

BAE Systems is currently (mid-January 2012) yielding just under 6% with a dividend cover of 2.3 and a p/e of only 7.5. The dividend has been growing at around 10% per year. There's very little debt but there is a scary pension deficit.

BAE is big, with a market cap over £10bn. The share price has been helped by a generous dividend and £500m share buy-back programme.

The company is seeking to diversify away from its dependence on NATO procurement, and is developing two non-defence business segments (commercial aerospace electronics, and cyber security) as well as pursuing international sales. It has spent half a billion pounds over the last 12 months acquiring companies in the cyber security field, building a business in what must surely be a growth market.

However, the traditional Land and Armaments division, manufacturing military hardware, saw revenues drop 40%. 80% of sales are in North America and Europe. So the company faces a strategic challenge in building its new businesses fast enough to compensate for declines in traditional markets.

Motley Fool has recently identified BAE Systems as one of '5 Shares for 5 Years'. It notes that the aerospace and defence sector has been hit by recent defence cutbacks, knocking back the share price by around 50% from its end of 2007 peak, but has recently recovered.

Defence is a 'lumpy' business, and earnings per share have gyrated a bit over the past few years but it appears to be a well-managed cyclical business coming through the downturn in reasonable shape. No doubt there will be bumps along the way - for example: changes to the Saudi Arabia Eurofighter Typhoon jet order may impact its 2011 profits.

Nevertheless, for me, BAE Systems is a HOLD (it would be a BUY but I already have a big enough chunk in my portfolio).

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

1 comment:

  1. There just had to be a downside to the story. That 40% drop is huge. However, with a number of countries actively upgrading their hardware, I wouldn't be surprised if BAE more than compensates for that loss.