I’ve looked at BAE Systems (LSE: BA.) with thoughts of buying a good few times over the years. Then when Russian tanks rolled into Ukraine in 2022, the stock spiked. The BAE share price is now up 37% in five years, so have I missed the boat?
High price?
The price did get a bit hot a few months ago. And when it peaked at 1,037p in April, the forecast price-to-earnings (P/E) ratio stood at 19.
A bit toppy? Maybe. But now that BAE shares have dropped back, the P/E is down to 17. That’s still higher than the FTSE 100 average, but here’s the thing…
The City values a stock on future earnings, not today’s. So a stock with growth prospects often tends to have a high P/E.
Is a growth share P/E fair for BAE? Well, we should see beefed-up defence spending across NATO in the years ahead. So I think it might be.
Results soon
Results for the first half are due on 2 August. And in its May update, BAE stuck to its guidance. That’s for a sales rise of 3-5% in 2023, with EPS up 5-7%.
Free cash flow for the year should come in above £1.2bn. And BAE puts total cash flow for the three years from 2023 to 2025 at £4bn-£5bn.
To me, that cash flow is the key figure right now. It confirms my view of BAE as a long-term cash cow, and that’s good for dividends.
The dividend yield is only around 3% though. But it should be covered two times by earnings. And future rises could see it fill investor’s pockets quite nicely in the decades ahead. But it’s still a bit low.
Time to buy?
I don’t expect any shocks in next month’s results. I’ll check on debt, but there’s no real fear there.
At the end of 2022, net debt stood at £2bn. And that’s small change for a firm with a market-cap of £28bn and annual sales of £23bn.
So will I buy? If I had enough cash to purchase every stock I thought was good value, yes I would. But when I look at the risk and reward, I just think there are better buys out there.
The big risk, I think, is that UK investors have a fragile bond with any kind of engineering firm. This is one of the best defence engineers in the world, yet BAE shares have been on low valuations for years.
Out of mind again?
I fear that when the Ukraine factor fades, a lot of investors could forget the stock again, and the BAE share price could fall.
I also buy mainly for good dividends these days, and there are many in the FTSE 100 with yields that are a lot higher. And some of the big yields are well covered.
In the end, I do think I see a good growth stock here that could raise its profits for years to come. But I think I can earn more from other stocks, with less risk.
