The share price of the UK’s largest defence contractor, BAE Systems (LSE: BA.), suffered minor losses this morning (19 February) after posting its full-year 2024 results.
It had started the year with exceptional growth, up 16% year-to-date when markets opened on Monday this week. Then this morning it announced its full-year 2024 results. Despite strong sales and revenue, some figures missed analyst expectations.
Even though the news was positive overall with an increase in cash flow guidance, the shares slipped 3% in early morning trading.
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The numbers
Today’s earnings report covered the 12-month period ending 31 December 2024. The company reported strong performance with both sales and revenue up 14% to £28.3bn and £26.3bn, respectively.
Underlying earnings per share (EPS) increased 10% to 68.5p (from 63.2p) and operating profit grew 4%. Underlying earnings before interest and tax (EBIT) also increased 14% to £3.2bn.
The final dividend announced for the year was increased by 11% from 18.5p to 20.6p, bringing the total annual dividend up to 33p, a 10% gain from 30p in 2023. With a history of reliable dividend payments, the yield of 2.4% makes it an attractive option for income-focused investors like me.
Analysts expect continued sales growth of between 7% to 9% and underlying EBIT growth of 8% to 10%. This is based on an expectation of increasing demand for defence systems.
Business developments
BAE recently secured a $251m contract to support the US Navy’s AEGIS Combat System, another gold star for its impressive portfolio of global defence projects. With defence budgets on the rise worldwide, such contracts help ensure the company is well-positioned for long-term growth.
The new deal with the US Navy is just the latest in a series of wins. The deal grants BAE rights to provide critical engineering and technical services for the AEGIS system, a key component of US naval operations. Along with other significant contracts secured in late 2024, it reinforces an already comprehensive order backlog, promising revenue for years to come.
Factors that could hinder growth
No investment is without risk, and BAE is no exception. A change in government defence budgets, supply chain disruptions or a rise in geopolitical tensions could impact its performance. It’s also at risk of losing contracts to US-based competitors like Lockheed Martin or Northrop Grumman.
Unlike BAE, these companies have suffered stock declines since the US election following an expectation of lower defence spending. This could lead to them competing more aggressively for EU-based contracts, threatening BAE’s future revenue.
While its valuation still looks good, it could be moving toward overbought territory. The share price has been soaring in recent months, so its price-to-earnings (P/E) ratio, at 21.8, is slightly above the UK market average. This could limit the potential for further capital appreciation, despite forecasts predicting earnings growth of 8.2% per year going forward.
However, its diversified portfolio and global presence provide some cushion against these risks.
With a strong start to 2025, high-profile contracts and positive analyst sentiment, I believe BAE remains a stock worth considering this year. Its defensive nature adds stability to my portfolio and after today’s positive results, I plan to continue adding to my holdings in 2025.
