This can only be good news for BAE Systems. An increase in spending of 0.2% equates to £23 billion per year.
To put this into context, the UK’s largest defence company’s turnover in the year to 31 December 2023 (FY23) was £25.3 billion.
|
Fiscal year |
Sales (£bn) |
Adjusted earnings before interest and taxes (£bn) |
Adjusted earnings per share (Pence) |
Order book (£bn) |
|---|---|---|---|---|
|
2021 |
21.3 |
2.2 |
50.7 |
35.5 |
|
2022 |
23.3 |
2.5 |
55.5 |
48.9 |
|
2023 |
25.3 |
2.7 |
63.2 |
58.0 |
Of course, it is highly unlikely that all the additional spending would go to BAE Systems. I am sure Rolls Royce Holdings, Serco Group, Babcock InternationalAnd QinetiQ everyone would get their fair share. Not to mention a number of unlisted companies.
But even if BAE Systems received only a small stake, it could potentially improve the company’s financial performance and drive up its share price.
timing
When a stock has had a good run, it is sometimes easy to think that it is too late to invest.
But a quality company will continue to deliver. Warren Buffett did not invest in Apple until after the launch of the ninth version of the iPhone. Yes, he “missed” a six-fold increase in the stock price. However, since his first investment, the value has increased more than seven times.
BAE Systems’ share price has fallen 9% in six weeks. This could be an ideal opportunity to get involved.
The shares currently trade at a historical price-to-earnings (P/E) ratio of 20 – double the FTSE 100 average – so are not a bargain. However, that compares favorably with Rolls-Royce, which trades at 28 times earnings.
And the 75 largest US defense companies have a combined P/E ratio of 47. However, stocks on the other side of the Atlantic achieve higher valuation multiples in most sectors.
Unfortunately, we live in a dangerous world. The Doomsday Clock has never been this close to midnight and there are currently almost 50 armed conflicts around the world. Therefore, the growth prospects for the defense sector appear good.
However, the ethical issue must also be addressed. Some people are afraid to enter this sector. But in my opinion, the main task of a government is to ensure the safety of its citizens, so I would not rule out investments on moral grounds.
However, due to the low dividend, I would rule out investing in BAE Systems.
The company paid 30p in fiscal 2023, which equates to a current yield of 2.4%. There are many FTSE 100 stocks that offer a far better yield.
For this reason alone, I do not wish to comment on this matter.
The post “Is This FTSE 100 Share Now a Bargain After a 9% Drop in 6 Weeks?” appeared first on The Motley Fool UK.
Further reading
James Beard does not own any of the stocks mentioned. The Motley Fool UK has recommended Apple, BAE Systems, QinetiQ Group Plc and Rolls-Royce Plc. The views expressed on companies mentioned in this article are those of the author and may therefore 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.
Motley Fool UK 2024
