BAE shares are tanking. Here’s what I’d do now

BAE shares are tanking, down 6% in one day. There are many factors to consider. Here’s what I’m doing, says Rachael FitzGerald-Finch.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

6%. This is how much the BAE Systems (LSE:BA) share price has dropped in only four days.

Moreover, it’s still down 26% from its pre-corona crash peak on 21 February.

And, it’s lower than the assigned fair value of some analysts of 570p. Indeed, back in January, other analysts advised investors to hold the stock at 671p.

BAE stock already looks undervalued.

So, why’s the price still dropping, and what should I do about it?

The recent movements in BAE shares 

Quite frankly, I think BAE was caught in Monday’s FTSE plunge as markets feared a second coronavirus shutdown. Unfortunately for BAE, this news overshadowed its Archfish contract renewal with the US Navy.

Ironically, the defence manufacturer’s news of a $1bn debt issue coincided with a rise in its share price only one week earlier.

BAE’s debt is already substantial but the markets, and ratings agencies, appear buoyed by its funding of two new strategic acquisitions, Collins Aerospace Military Global Positioning Systems and Raytheon’s Airbourne Tactical Radios.

BAE is expecting these market leaders to improve its own electronic systems offerings. In turn, this is a high priority area for US defence spending and should help BAE to continue to offer innovative capabilities to its markets. 

Debt and the dividend yield 

Despite the new debt issue not affecting BAE’s credit rating, moving forward the firm will be expected to reduce its debt pile if it wants to maintain its rating. I think BAE is expecting its new acquisitions to help provide some of the cash flow to do this.

However, it’s likely shareholder returns will be examined too. BAE currently offers a relatively impressive 4.6% dividend yield.

A yield of this size from a company with long-term stable cash flows is highly attractive. The nature of BAE’s business means it has many long-term government-funded contracts, including building the UK’s Type 26 frigate and a stake in Lockheed Martin‘s F-35 Joint Strike Fighter.

This type of business provides stability in both earnings and dividends.

However, I think the current dividend yield will be reduced to pay down debt. BAE has limited room for manoeuvre here and shareholder returns will likely be a prime target.

But, for shareholders, there may be capital gains to be had later.

BAE is strongly positioned for further growth. The damage from the Covid-19 shutdown isn’t as bad as feared, and the firm secured $9.3bn of new orders during the first half of this year, making a total order backlog of $46.1bn.

BAE is expecting the second half of this year to be stronger, with overall increases in both revenues and earnings. Despite an expected slowdown in US defence spending, with its new acquisitions BAE is aligning its US businesses to American defence priorities. I’m hopeful this will pay off in the long-run.

BAE on sale

I like the fact that BAE shares are on sale right now. Yes, I think the firm is too heavily indebted. But, it is already implementing measures to deal with it. Its new acquisitions appear strategically aligned and it has a stable dividend, albeit there’s a possibility of it being lowered.

Overall, BAE shares are selling at a good price. There are returns to be made. I’m buying. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rachael FitzGerald-Finch has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

I’m not surprised the IAG share price is surging, it’s the top-rated UK stock

The IAG share price is up 57% since the start of the year, but remains undervalued. This bull run could…

Read more »

Investing Articles

Is the stock market set for a crash in 2025?

Could antitrust lawsuits derail US tech stocks and cause a stock market crash next year? Stephen Wright thinks the risks…

Read more »

Investing Articles

As Rolls-Royce’s share price falls 8%, is it time for me to buy on the dip?

Rolls-Royce’s share price has dropped after a stellar rise this year. I think this leaves it looking even more discounted…

Read more »

Engineer Project Manager Talks With Scientist working on Computer
Investing Articles

I reckon this S&P 500 stock could be among the best shares for me to buy today

This S&P 500 monopoly stock's trading at a 30% discount to its historical valuation just as growth could be about…

Read more »

Investing Articles

A ridiculously cheap FTSE 250 stock to buy today?

The FTSE 250's rising by double-digits, but this stock's seemingly falling behind despite higher cash flows and dividends. At a…

Read more »

Investing Articles

The FTSE 100’s trading near a 52-week high! I’m still looking to buy

The FTSE 100's slowly making its way towards record highs, but there are still dirt cheap buying opportunities to discover…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

1 surging stock I think could gatecrash the FTSE 100 in 2025!

Royston Wild reckons this FTSE 250 share is heading all the way to the Footsie. Here he explains why it's…

Read more »

artificial intelligence investing algorithms
Investing Articles

Should I buy skyrocketing Palantir stock for my ISA in 2025?

This red-hot artificial intelligence share has even outperformed Nvidia so far this year. Is it finally time I added it…

Read more »