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When I bought BAE Systems (LSE: BA) shares in March last year, I got my timing exquisitely wrong. I’d be watching the FTSE 100 defence manufacturer climb for months, if not years, waiting for an entry point. Eventually, I realised that there’s no point timing these things, and dived in.
Inevitably, that was the moment when markets decided the stock was too expensive, and I ended up with an immediate double-digit loss. Happily, the setback hasn’t lasted long.
It wasn’t a crash, more a pause. The valuation had run too far, too fast. But on 28 February, Donald Trump publicly turned on Ukrainian President Zelenskyy. Europe woke up to the new reality that it couldn’t rely on the US to underwrite its security forever, and began beefing up defence budgets. BAE’s been one of the biggest beneficiaries.
Top FTSE 100 growth stock
Anyone investing £10,000 in BAE shares six months ago (on 29 November), would have picked up around 815 shares at 1,227p each. Today, they’re trading at 1,897p. That’s an increase of almost 55%, turning £10,000 into £15,500.
BAE isn’t really known for income. The trailing yield sits at just 1.74%, which looks modest, but that’s only because the share price has flown. The board has a solid progressive dividend policy too.
In 2021, the total dividend stood at 25.1p. That rose to 27p the following year, then 30p in 2023 and 33p last year. Over four years, the payout’s increased by almost a third. With the 2024 final dividend of 20.6p per share landing on 2 June, those holding since November will collect around £168. With luck, many more will flow.
Latest update reassures
On 7 May, BAE confirmed it had made a strong start to 2025, with full-year guidance reaffirmed. The board expects revenues to grow 7-9%, and underlying earnings per share to rise 8%-10%. Free cash flow’s expected to exceed £1.1bn.
The order book remains robust, thanks to several new US contracts. These include a $356m order for armoured vehicles and a near-$800m extension with the US Air Force. It also picked up missile orders worth around £600m and moved ahead on Canada’s River-class destroyer programme.
Keir Starmer’s EU deal could open up its €150bn defence fund to BAE Systems.
Toppy valuation
Of course, there are risks. Cash-strapped European governments may not follow through on their defence promises. If geopolitical tensions ease – which seems unlikely, sadly – the whole defence sector could fall out of favour.
BAE’s valuation is also looking stretched, with the price-to-earnings ratio of more 27. Even the slightest stumble could trigger a correction from here. Analysts are cautious too. The 12-month median target is just under 1,770p. That’s nearly 7% below where we are now.
Still, for investors taking a long-term view, BAE still looks like one to consider buying. Defence isn’t going out of fashion any time soon, I’m sorry to say. And if peace does break out for some unimaginable reason, I’ll gladly take the hit.
This story originally appeared on Motley Fool
