The BAE Systems share price: one of my top 5 blue-chip stocks

The BAE Systems share price is backed up by the firm’s incredibly attractive qualities, which are rarer than we might think among blue-chip stocks.

| 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.

I think the BAE Systems (LSE: BA) share price is one of the top five investments in the FTSE 100. Today, I’m going to explain why.

Defensive defence

Ethical considerations aside, the business of selling weapons to countries around the world is an incredibly defensive one. Defence contracts between governments and defence contractors are usually multi-year deals. In many cases, these agreements extend into hundreds of millions, or billions, of pounds.

What’s more, because the defence industry is highly regulated and controlled, a handful of companies effectively control the market. BAE Systems, for example, is one of the world’s largest weapons producers. It is by far the largest in the UK and one of the top five weapons producers in the world. Its sales are twice as big as those of its closest European peer, Airbus Group (although weapons sales account for less than a fifth of Airbus’s total sales). 

BAE’s size gives it a substantial competitive advantage, in my opinion. It has more money to invest in new technologies. It can also produce equipment at a lower cost than many of its peers.

Moreover, the company also has unrivalled experience in specific sectors, such as shipbuilding. Not only has the group won multi-billion-pound contracts to build new vessels for the UK submarine and surface fleets, but in 2018 the organisation won a £20bn contract to build Australia’s fleet of new navy frigates.

Put simply, this is an international giant of a company. Further, it dominates its industry and has tens of billions of pounds in revenues guaranteed for the next few years. 

BAE Systems share price risks 

Despite the company’s strengths, it does face risks and challenges as well. As noted above, the global defence industry is highly regulated. This means the firm could be blocked out of specific markets or lose its contracts if it doesn’t conform to government specifications.

There are also ethical considerations to take into account. Some investors may not be comfortable owning part of a business that manufactures weapons for countries such as Saudi Arabia. BAE could face sanctions and restrictions for selling to certain countries and individuals. 

Another unique challenge the company faces is that the government owns what is known as a Golden share in the business. This prevents the corporation from making any extreme changes to its Articles of Association without the Secretary of State’s permission. 

There are certainly significant reasons why some investors might not want to own the BAE Systems share price. However, for the reasons outlined, I think the stock is one of the best businesses in the FTSE 100.

Therefore, I’d buy the company for my portfolio today. The stock’s 5% dividend yield also looks so attractive in the current interest rate environment. However, this is just a guide, and there’s no guarantee the organisation will meet this distribution target.

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.

Rupert Hargreaves 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

Here’s the best-performing FTSE 100 stock of the last 10 years

Private equity firm 3i has outperformed the rest of the FTSE 100 over the last 10 years. And its big…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

Here’s why Warren Buffett is selling shares (and why I’m not)

Warren Buffett cited tax considerations as his reason for selling shares in Apple. But this isn’t something most UK investors…

Read more »

Investing Articles

What on earth is going on with the AstraZeneca share price?

The AstraZeneca share price has fallen 30% from its peak in August. Dr James Fox explains what’s going on with…

Read more »

Investing Articles

2 high-yield FTSE 100 shares I’d consider buying for passive income…and one I’d avoid

Some FTSE 100 stocks have eye-popping dividend yields. But will the passive income actually be dished out? Paul Summers takes…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

These 2 former stock market darlings are trying my patience! Time to sell?

Harvey Jones thought he was getting a bargain when he snapped up these too much-loved FTSE 100 dividend growth stocks.…

Read more »

Investing Articles

Here’s how I’d use £3,000 to target a second income that grows each year

Our writer explains the approach he'd take to trying to build a second income that gets bigger over time, by…

Read more »

Elevated view over city of London skyline
Investing Articles

Is it time to buy this incredible FTSE dividend share?

Christopher Ruane examines one FTSE 100 share with a phenomenal dividend history. Does a steep share price fall this year…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

This FTSE 100 share has just crashed another 20%. Its P/E is now just 9.9 so should I buy?

Harvey Jones was tempted to buy this FTSE 100 share after it crashed in October. Now it's crashed again, it…

Read more »