Defence stocks are among the most popular during tough geopolitical and macroeconomic periods. This explains why the BAE Systems’ (LSE:BA.) share price has jumped 43% during the past 12 months.
The FTSE 100 weapons builder has risen in value as war in Ukraine has boosted defence spending forecasts. Concerns over the direction of the global economy have also supercharged interest in the company. Arms spending historically remains largely unaffected by broader economic conditions.
Should you invest £1,000 in BAE Systems right now?
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So could BAE Systems shares be the best choice for income investors today?
Average yields
Discussing the company’s dividend yield is the first place to start. This indicates how much a share is predicted to pay out in dividends relative to its share price. It’s therefore a good yardstick for gauging value for money.
BAE Systems’ dividend yield sits at 3.4% for 2023, just below the FTSE 100 forward average of 3.5%. The yield improves for 2024 but only fractionally, to 3.6%.
This suggests the business isn’t a good choice for making market-beating passive income today. There are dozens of FTSE index shares with forward dividend yields north of this.
Well protected
That said, BAE Systems looks in great shape to meet the City’s payout forecasts. The same can’t be said of all London shares as the global and UK economies splutter.
The business is tipped to pay a 28.8p per share annual dividend in 2023. A 30.5p dividend payment is forecast for next year. These predicted rewards are covered 2.1 times by anticipated earnings.
A reading of two times and above provides a decent margin of safety for investors.
BAE Systems also has a strong balance sheet that could help it pay projected dividends even if earnings disappoint. Its ample liquidity in fact encouraged it to launch a three-year, £1.5bn share repurchase programme over the summer.
Dividend growth
Personally speaking, I’d buy BAE Systems shares because of its brilliant history of annual dividend growth. Owning income stocks that reliably raise the yearly payout can protect investors’ wealth from inflation-related pressure.
This FTSE 100 stock has raised the total dividend every year since the early 2000s. Its robust market outlook and rugged balance sheet suggest payouts should continue growing for the foreseeable future.
The verdict
Of course BAE Systems shares aren’t immune to risk. Supply chains are a problem in the industry and these could affect the company’s ability to meet orders. It also has to compete with other major US and British defence businesses for government contracts.
But on balance I think BAE Systems is one of the safest FTSE 100 dividend payers out there. Global defence spending smashed through £2trn for the first time in 2021, according to latest data from the Stockholm International Peace Research Institute.
Spending is on course to keep growing strongly following Russia’s invasion of Ukraine, too. And due to its strong relationships with Western governments, BAE Systems can expect orders to continue climbing over the long term. I’d happily buy this dividend share if I had spare cash to invest.
