BAE Systems Plc is a global defence and security group. It is the world’s second largest defence contractor.
The group designs and manufactures a wide range of products and services for air, land and naval forces, as well as advanced electronics, security, information technology solutions and support services.
The group’s main customers are the Ministry of Defence and the US Department of Defense, which during 2010 represented a combined 57% of revenues.
US and UK Government spending cuts are likely to take their toll on BAE, the next few years, but any influx of new orders from overseas could mitigate lower earnings.
Emerging markets are increasing defence spending and BAE Systems is well placed to win orders from the Middle- and Far East, and South America.
According to Collins Stewart’s analyst Paul Brant “BAE’s broad emerging markets exposure stands in contrast to the ‘extreme focus’ of the other major defence contracts”. (15 November 2011).
The group is in the race to secure major orders for its Eurofighter joint venture from India, the Middle East, Japan and Brazil. The Eurofighter Typhoon is manufactured by a consortium of four European nations.
In November 1999, British Aerospace pLc merged with the Marconi Electronic Systems business of The General Electric Company plc, and the resulting entity was renamed BAE Systems plc.
Dividend history and policy
Between 2000 and 2010, the annual dividend has advanced from 8.5p to 17.5p per share – 8% compound growth – and during that time dividends were never cut and held just the once (2003).
Importantly the dividend proved resilient in the face of some bumpy earnings and various exceptional costs registered throughout the last decade.
Dividends must have been paid long enough for several cycles of share price undervalue and overvalue to be established, in order that extremes of high and low dividend yield can be observed.
The Value Table shows the dividend yields at which a company’s share price is at historic undervalue levels – low share price (LoPr) with high yield (Hyld%) – as well as at historic overvalue levels – high share price (HiPr) with low yield (Loyld%).
Share prices are Undervalued or Overvalued when they are within a ten per cent range of their historic levels of high dividend yield (Hyld%) or low dividend yield (Loyld%).
The numbers in the share price columns (LoPr and HiPr) are the equivalent share prices to the dividend yields shown in the respective undervalued and overvalued dividend yield columns.
The color coding in the Status (‘S’) column of the table indicates the current share price valuation of the company. The column will be green when the company is historically undervalued, orange when the company is historically overvalued and white when the company is trading between historically undervalued and overvalued.
Share prices are Undervalued (Green) or Overvalued (Orange) in the Yield Chart when they are within a ten per cent range of their historic levels of high or low dividend yield.
Highs (Blue) and Lows (Red) are shown based on the monthly high and low share prices.
To reduce the period under consideration drag to the right the “slider” below the chart.
From the years collated BAE Systems has a track record of:
A long period of uninterrupted dividends will show us how companies and their management teams have performed going through several business and economic cycles.
Dividend growth is the hallmark of a high quality company. Dividends will not be maintained or raised if future earnings are in doubt.
A company that is making profitable progress should be able to boost its dividend by 7.5% or more at least five times in a 12-year period.
Compound Annual Growth Rate
For illustration purposes, we show the 5 year dividend CAGR and 12 year dividend CAGR for BAE Systems:
Note: CAGR is a pro forma number that provides a “smoothed” annual yield, so it can give the illusion that there is a steady dividend growth rate even when the annual dividend increases can vary significantly.
CAGR is used as a measure to evaluate how well one dividend paying company performed against other dividend paying companies in the same sector.
We are particularly interested in companies with a dividend CAGR of 8 per cent or higher for both the most recent five and twelve year periods.
The Financial Strength of a company is a weighted composite score of quantitatively analysed metrics taken from the Balance Sheet, Income Statement and Cash Flow Statement.
The top score is an 8. A score of 7 and above is considered to be financially strong. A score of 5 and above is considered to be financially okay. A score of 3 and above is considered to be financially poor. A score of below 3 is considered to be a bankruptcy possibility.
Steven Dotsch, the managing editor of Dividend Income Investor.com, owns shares in BAE Systems via the Dividend Income Portfolio.