An uncertain outlook for the global economy also casts a shadow over dividend forecasts for many FTSE 100 shares. But BAE Systems (LSE:BA.) looks in great shape to continue hiking investor rewards over the short-to-medium term.
City analysts think the defence firm will pay a total 29p per share dividend in 2023. That’s up from 27p last year.
Additional increases, to 31.4p and 33.9p per share in 2024 and 2025, are also tipped by forecasters.
But how realistic are these dividend estimates? And should I buy BAE Systems shares for my portfolio today?
Robust forecasts
| Year | Dividend yield |
| 2023 | 3% |
| 2024 | 3.3% |
| 2025 | 3.6% |
The BAE Systems share price has risen 25% over the past year. Since Russia’s invasion of Ukraine in February 2022 the weapons builder has gained more than 50% in value.
This in turn means that dividend yields for the next few years trail the 3.7% FTSE 100 forward average. This is disappointing but it wouldn’t discourage me from buying the company’s shares for passive income.
As I say, dividend forecasts at many UK shares are in danger as the worldwide economy splutters. It’s my belief that that that near-4% forward dividend yield for blue-chip stocks apears built on shaky foundations.
By comparison, payout estimates for BAE Systems look very robust. Predicted payouts are covered around 2.1 times by expected earnings over the next three years. Any reading above two times provides a wide margin of error for investors.
I must add that I’m expecting earnings projections to be blown off course, however. Supply chain issues could limit the firm’s ability to meet project deadlines. But on the whole, profits visibility here is excellent. This is thanks to the predictability of arms spending and BAE Systems’ excellent project execution.
The company also has impressive cash generation it can use to pay dividends if profits come in low. Indeed its strong cash flows encouraged the firm to lauch the third tranche of its share buyback programme earlier this month. This is worth a juicy £500m.
Dividend growth
I’d also buy BAE Systems shares on the expectation that profits (and therefore dividends) will rise strongly beyond 2025. For the record, brokers expect annual earnings growth here to average a solid 9% over the next three years.
The increasingly unstable geopolitical landscape means that arms budgets are soaring. The outbreak of war in Eastern Europe rocked the status quo and prompted an increase in global defence spending. Rising concern over Chinese foreign policy is also driving military expenditure higher in North America, Europe, and parts of Asia.
China alone plans to raise defence spending by 7.2% in 2023. And Western nations will be eager to keep ramping up their own defence budgets in response. This bodes well for BAE Systems as a major supplier to the UK and US governments.
Last year, the FTSE 100 firm enjoyed record orders north of £37bn. I believe it can expect to enjoy considerable amounts of new business as the decade rolls on.
