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BAE Systems (LSE: BA) shares have had a smashing five years. International Consolidated Airlines Group (LSE: IAG) has done splendidly too. Happily, I hold both in my SIPP and have no intention of selling either.
But I have some cash sitting in my account and was wondering which FTSE 100 winner looks better value today, and which has the better growth prospects. These two high-flyers have been driven by very different forces lately. So what’s behind their success?
Defence demand
BAE Systems has benefited enormously from the surge in defence spending. Latest half-year results (30 July) were impressive, with sales up 9% to £15.7bn and underlying operating profit rising 11% to £1.7bn. Its record £84bn order backlog gives it huge visibility over future revenues.
The board returned £933m to shareholders in the first half through dividends and buybacks, while its dividend has been increased for 22 consecutive years. Many will see this as a growth stock rather than an income play, but that 1.84% trailing yield is a welcome extra. BAE also has an ongoing share buyback programme of up to £1.5bn.
IAG had a hellish time during the pandemic but demand for air travel has recovered strongly since, while its transformation programme is making its portfolio of airlines more efficient and profitable.
Cyclical challenge
Half-year results (31 July) showed revenue edging up just 1% to €16.1bn. Operating profit before exceptional items fell 6.4% to €1.76bn as higher fuel costs and Middle East disruption took their toll. Free cash flow was a hefty €2.9bn, and net debt was cut again to €4.7bn.
IAG is also returning plenty of cash to shareholders, with its own €1.5bn buyback programme. Its 1.99% trailing yield is pretty similar to BAE’s.
The big difference is the valuation. IAG trades on a low price-to-earnings (P/E) ratio of just 7.1 against 26 for BAE Systems. That makes IAG look dramatically cheaper.
There’s a reason. Airlines are notoriously cyclical and can be hammered by recessions, fuel prices, geopolitical shocks, strikes, climate regulation and even volcanoes. BAE is far more defensive. It tends to benefit when the world is troubled.
My verdict
Share price performance has been remarkably similar. BAE has flown 267% over five years. IAG is up 201%. Both have slowed markedlly in the last year though, rising 11% and 9%, respectively. BAE is richly valued, while Middle East turmoil and the cost-of-living crisis are adding baggage to IAG.
One-year consensus forecasts are surprisingly close too. BAE has a target of 2,346p. If correct, that would mark a rise of 19% from today’s 1,971p. IAG has a target of 528p, around 23.5% higher than today’s 427p.
Arguably, IAG is the better value. But it’s also the more volatile proposition. BAE is less risky but its dizzying P/E suggests a lot of good news is already priced in.
I think both could complement each other nicely in a balanced portfolio. Investors might consider buying either, depending on what they already hold. But I’ll stick with what I’ve got. there’s another FTSE 100 buying opportunity I’m looking at today…
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Harvey Jones owns shares in BAE Systems and IAG.
This story originally appeared on Motley Fool
