BAE Systems (LSE: BA) shareholders have reason to cheer at the moment. Since 6 October, the BAE share price has climbed 4.8%. And over the past 12 months, it’s up 18%. It’s all part of the post-pandemic recovery, which has helped a number of engineering firms.
I’ve liked BAE for some time, though I’ve never bought. But right now, I’m considering it as a candidate for my Stocks and Shares ISA. I have already missed a big increase, for sure, but I can’t help feeling there could be a lot more to come. And I don’t mind missing the early big gains if I reduce my risk by waiting a bit.
BAE has been something of a growth story over the past year. But I’ve always seen it more as a top dividend stock, and I’d be buying for income. The dividend was slashed for 2019, but it has already come storming back. For the 2020 year, BAE paid a 23.7p ordinary dividend. And it topped that up with a special 13.8p per share payout to compensate for the 2019 withholding.
So overall, the actual payments have kept going in a nicely progressive manner. At the interim stage, BAE announced a 5% hike to this year’s dividend. That would bring it to 24.9p. And on the current BAE share price, we’d see a yield of 4.2%. It should be around twice covered by earnings, providing a bit of a safety margin. So we have a decent yield, very well covered, even after the share price surge of 2021.
Cyclical threat to earnings
What’s the downside of investing in BAE Systems? Well, it’s in the aerospace and defence business, which is notoriously cyclical. All it would take is a drop for a few years in arms spending, and BAE’s earnings could fall. With the company maintaining strong cover, the dividend would surely suffer. And that in turn could hit the BAE share price.
Saying that, the BAE dividend has been rising every year since 2005. That’s after allowing for the 2019 shortfall, though that was really just a delay rather than a genuine cut.
At the halfway stage, as well as revealing its strengthening dividends, the company did something that I really like to see. BAE announced a new share buyback programme, of up to £500m to be completed by July 2022.
BAE share price still low?
A share buyback is a different way of returning spare capital to shareholders. They don’t get any cash directly from it. But buying and canceling shares means future earnings and dividends are spread less thinly. So the share buyback says good things to me about the company’s long-term dividend outlook. It also says the board sees the shares as good value.
So can this improving dividend outcome send the BAE share price to 600p and beyond? I think there’s a pretty good chance it could. There is, though, the downside risk that investors could see the shares as fully valued now. They might take some profits, and that could send the shares down.
BAE is still on my buy list as a dividend candidate, and I’d see 600p as a bonus.
5 Stocks For Trying To Build Wealth After 50
Markets around the world are reeling from the coronavirus pandemic…
And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.
But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.
Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…
You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.
That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.
Click here to claim your free copy of this special investing report now!
Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
This post was originally published on Motley Fool
