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Giant of defense BAE Systems (LSE: BA.) has been a stellar performer over the past year, with its shares up nearly 30% as geopolitical tensions have increased global defence spending. But recent rumours about possible UK defence cuts have put the spotlight on this issue. FTSE 100 Index So, should smart investors keep a close eye on BAE Systems' share price?
The good, the good and the uncertain
The company has benefited from a wave of rising defense budgets around the world. Against a backdrop of escalating conflict and tension, countries have been beefing up their military capabilities, and the company has been more than willing to oblige. A diversified portfolio of products and services, spanning from cybersecurity to combat vehicles, has positioned it well to capitalize on this.
However, the defence sector was in for a bit of a surprise recently when reports emerged of possible cuts to UK defence spending. The autumn statement is approaching and there is talk that some MoD projects could be in the crosshairs. This news sent shivers through the sector, with BAE shares suffering a 2.8% drop on Monday.
Before we start preparing, it is worth noting that the company is not solely dependent on UK defence spending. In fact, it has a global presence, with significant operations in the US, Saudi Arabia and Australia, among other countries. I believe this international diversification helps cushion any potential blow from UK budget cuts.
Moreover, the geopolitical landscape remains tense, with no signs of major conflicts calming down in the near future. This unfortunate reality means that global defence spending is likely to remain robust in the medium term, potentially offsetting any localised budget cuts.
The numbers
The stock is currently trading at a price-to-earnings (P/E) ratio of around 21.5 times, which is slightly higher than its historical average. This suggests that the market has already adjusted to some optimism about future prospects. However, it is worth noting that earnings are projected to grow at a steady pace of 7.34% per year.
The company also boasts a reliable dividend yield of 2.36%, which, while not a stunner, does provide a nice stream of income. With a payout ratio of 51%, there is room for growth if earnings continue to improve. In my opinion, the company is in good shape, but after a rally like this, I'd probably like to see something better. With the stock doubling in value over the past five years, any disappointment or challenge could send investors packing.
The final result
So should investors be keeping an eye on BAE’s share price? In a word: probably. But not for the reasons you might think. While potential UK defence cuts are worth keeping an eye on, they are unlikely to be a game-changer for a company of this size and global reach.
Instead, I will focus on management’s ability to navigate the complex geopolitical landscape and take advantage of emerging opportunities. I will pay particular attention to the order book, which stands at a whopping £66.2 billion, and the ability to convert this into tangible revenue and profit growth.
For long-term investors, I would say that BAE Systems remains an interesting proposition. However, in the world of defence, as in the world of investments, it pays to be prepared for any eventuality. For now, I will stay on the sidelines and keep it on my watch list.