Is BAE Systems plc (LON:BA.) BAE is also to a great degree a knowledge based company and so acquisitions can be of value provided we know whether the goodwill is actually being “sustained.” All in all while it doesn’t meet the formula overall it might be a good long term investment? In this case, if we adjust capital employed to remove the £10 billion of intangible assets and add back in the pension deficit (kindly assuming that it doesn’t exist) then BAE has produced an average net return on tangible capital employed of 53%, which is very good. dividend dates and history including final, interim and special dividends. This website uses cookies to improve your experience while you navigate through the website. When autocomplete results are available use up and down arrows to review and enter to select. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Jupiter AM: A good business but is it a good investment? In BAE’s case, its policy of progressive dividend growth and lack of earnings growth has given the company an average dividend cover over the last ten years of just 1.2. Most of the research on this site is based on data from SharePad and ShareScope. View BAE Systems plc (BA.) Our research team consists of equity analysts with a public, market-beating track record. Special Offer: Subscribe using the links above and get one month FREE of your chosen service. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Alternatively, if BAE was available with a yield of say 7%, then income rather than growth would do most of the heavy lifting and the dividend would only need to maintain its current 2% per year growth rate, or thereabouts. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business – which could be good or bad. Those earnings are, in turn, generated from revenues paid into the company by customers. In other words, the company has paid out 85% of its earnings over the last ten years as a dividend, and that’s a problem for a couple of reasons: (1) The margin of safety between earnings and the dividend is relatively thin, so any small but prolonged decline in earnings is likely to put the dividend under severe pressure. I think the current dividend yield will be reduced to pay down debt. If a company is paying more than it earns, the dividend might have to be cut. Even so, thin profit margins are generally not a good sign. A 7% yield would be achieved at a price of 320p, or 30% below the current share price. That’s because: (1) BAE Systems is the UK’s largest defence contractor which should make it a relatively defensive company (governments may cut back on defence spending during recessions, but typically any cuts are not drastic). So if earnings, revenues and capital employed are not going up then any dividend growth will eventually hit a ceiling. Arabia could put the multi-billion-pound sale where possible. (3) BAE’s capital base shrank for several years following government cutbacks after the global financial crisis. internally generated) growth. That’s why it can be a good idea to look at net returns on tangible capital as well as net returns on capital. nodes[i].dataset.subscription : nodes[i].getAttribute('data-subscription'); if(status ==='true') {nodes[i].checked = true;}}};var nodes = document.querySelectorAll('#form1783 select[data-value]'); if (nodes) { for (var i = 0; i < nodes.length; i++) { var node = nodes[i]; var selectedValue = node.dataset ? For a fee, of course. However, there’s a big difference between just being around and maintaining the UK’s ship/tank/aircraft building capabilities on the one hand and being a good (i.e. During the past 10-year period, the first annual payment was UK£0.2 in 2010, compared to UK£0.2 last year. To be at least fairly valued, BAE would need to grow its dividend at something more like 5% per year over the long-term. This category only includes cookies that ensures basic functionalities and security features of the website. Dividends per share have grown at approximately 4.4% per year over this time. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable. These are my best and worst performing stocks through the pandemic (so far), 2018 Performance review and lessons learned, Reviewing your portfolio’s returns and riskiness, Defensive value performance review: 2018 Q1, Selling Xaar: Why heavy R&D and high cyclicality are not a good mix, Ted Baker’s collapse is a lesson in the dangers of too much growth, Why Admiral is my favourite dividend growth stock. Ordinary 2.5p (BA.) The acquired goodwill (which is the amount paid for an acquired company above and beyond its net tangible assets) was mostly added to the balance sheet between 1998 and 2008 when BAE spent upwards of £10 billion buying other companies. Simply Wall Street Pty Ltd How can we tell? One reason why BAE’s dividend growth has almost ground to a halt in recent years is that the company’s dividend has pretty much caught up with its earnings. It would not be a surprise to discover that many investors buy it for the dividends. Consider getting our latest analysis on BAE Systems’ financial position here. Expenses would have to be cut rapidly, otherwise the company’s wafer thin profit margins would be wiped out in no time. *Interactive Brokers Rated Lowest Cost Broker by Annual Online Review 2020Have feedback on this article? (2) It has a long track record of progressive dividend growth, with the dividend going from 9.2p in 2003 to 22.2p in its recent 2018 results. Imagine a company with one factory that it built for £100 million. Dividends made by BAE Systems from their annual profits to their shareholders are shown here - normally on an interim and annual basis. It’s not very appealing all round really! at least matching the index) long-term investment. However, there are other things to consider for investors when analysing stock performance. Held it in the past, but not now for many years and probably never will. This is how much the BAE Systems share ... BAE stock already looks undervalued. It is mandatory to procure user consent prior to running these cookies on your website. Having said that, the company’s capital structure is clouded somewhat by two very large balance sheet items: £10 billion of acquired goodwill and a £4 billion pension deficit. And of course that doesn’t reflect the margin of safety which investors should demand when investing in a single company rather than a broadly diversified index tracker. Get in touch with us directly. Let’s be kind and assume £2.1 billion as our working figure. BAE Systems is an obvious choice for defensive dividend investors. It’s positive to see that BAE Systems’ dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut. The acquirer will still get £40 million of profits annually from this factory, but its return on capital employed is a far less attractive 8% (£40m per year from a £500m investment), purely because of the price it paid to buy the factory. Companies with large and relatively inflexible financial obligations can often find themselves in a lot of trouble very quickly. a good dividend stock? the risk that pensioners live longer than expected) is effectively offloaded to an insurance company. Slow and steady dividend growth might not sound that exciting, but dividends have been stable for ten years, which we think is seriously impressive. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. 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This could indicate that the company has never provided a dividend or We aim to bring you long-term focused analysis driven by fundamental data. These are typically companies that earn a relatively fixed percentage on the cost of goods or services sold, such as energy suppliers or distributors. Necessary cookies are absolutely essential for the website to function properly. Perhaps the market doesn’t think BAE Systems will be nationalised under Labour? Even a small rise in this company’s expenses must immediately be passed onto the customer, otherwise its thin profit margin would disappear and turn profits into losses very quickly.

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