BAE Systems (LSE: BA.) shares have been a great investment. Over the last year, they’ve risen about 31%. Over the last two years, they’ve climbed around 90%.
Are the shares worth buying today? Let’s take a look.
Healthy growth
BAE Systems’ recent 2022 results showed the defence company has a fair bit of momentum right now.
Boosted by the elevated threat environment, sales were up 4.4% year on year to £23.3bn. Meanwhile, underlying earnings per share (EPS) were up 9.5% to 55.5p (versus the consensus forecast of 53.9p).
On the back of this solid performance, the group lifted its full-year dividend by a healthy 7.6% to 27p per share (giving a trailing yield of around 3% at the current share price).
It also bought back around £0.8bn worth of its own stock during the year. Buybacks tend to boost earnings per share, over time.
Looking ahead, management is relatively confident about the future, citing a record order intake of £37.1bn, which has propelled the order backlog to £58.9bn.
“Our record orders and financial performance give us confidence in delivering long-term growth and to continue investing in new technologies, facilities, and thousands of highly-skilled jobs, whilst increasing shareholder returns,” said CEO Charles Woodburn.
Group finance director Brad Greve added: “For 2023, we’re forecasting further top-line growth, continued margin expansion, higher EPS and we’re also increasing our rolling three-year cash targets, all of which demonstrate that the business has growing momentum for the future.”
As for the company’s balance sheet, this was in good shape at the end of 2022. Cash on hand was £3.1bn while net debt (excluding lease liabilities) was £2bn. And the pension position, which was in deficit for years, was in an accounting surplus, thanks to higher interest rates.
Overall, the 2022 results and the 2023 outlook were quite encouraging, to my mind. Top- and bottom-line growth, a solid dividend increase, and share buybacks are exactly what I would want to see if I was looking to buy the stock.
Valuation
What about the valuation though? Is there still room for share price upside after the recent gains? Well, BAE Systems expects earnings growth of 5-7% this year. Taking the midpoint of this (6%) and applying it to last year’s EPS figure, we get a 2023 EPS forecast of 58.3p.
This means at the current share price, the forward-looking price-to-earnings (P/E) ratio here is about 15.6.
At this valuation, I wouldn’t expect to see huge gains in the short to medium term. However, I do think the stock could deliver solid returns in the long term, once dividends are factored in.
It’s worth pointing out however, that analysts at Jefferies recently raised their share price target to 1,060p from 1,000p. So they clearly see potential for gains in the near term.
Of course, for BAE Systems shares to keep performing, governments will need to keep spending on defence. I think they are likely to do so in the years ahead, given what’s going on in the world today.
However, we can’t rule out a pullback in defence spending at some stage. This scenario could lead to lower returns for investors in BAE.
So, as always, diversification’s a good idea. If I was to buy BAE Systems shares today, I’d also buy other stocks to manage risk.
