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I think this new contract is positive news for BAE Systems

Karl Loomes
·3-min read
Businessman leading a chart upwards
Businessman leading a chart upwards

I have long been a fan of BAE Systems (LSE: BA). While perhaps not a headline grabbing company most of the time, I think it is a solid performer. News today confirming its role in a £1.3bn contract to produce Eurofighters has only solidified this image for me.

German jet planes

Last week the German parliament signed off on buying 38 Eurofighter Typhoon jets for Germany’s air force. The £1.3bn contract is awarded to a consortium, of which BAE Systems is a key player. Specifically, BAE will produce the front fuselage and tails. Work begins in 2021.

Though the German contract will add money to BAE’s coffers, it is also indicative of a more positive trend. The Typhoo aircraft were chosen over their US rivals — the F-35 produced by Lockheed Martin.

This is an important trend for BAE Systems. Typhoons are key to the company’s finances as it develops the next generation fighter in its Tempest programme. Seeing continued demand for these over the newer F-35 is positive for BAE in the long term.

According to CEO Charles Woodburn, this latest contract “reinforces the aircraft’s position as one of the world’s most successful combat military aircraft”. Anyone invested in BAE Systems should hope this stays the case.

Production of the Typhoons is also adding to the technologies behind the new Tempest programme, which is set to go into production around 2035. Things such as 3D printing are being used now to enhance current production measurers.

In fact earlier this year BAE set targets for 30% of Tempest components to be produced by 3D printing. It also said 50% will be put together by robots. These lower-cost technologies will help secure the company’s bottom line for many years to come.

BAE Systems has government backing

One of the major positives I see with BAE Systems as an investment, is the positive attitude the government has towards it. Selfishly for them of course, given the importance of the company to the UK economy.

The Typhoon alone is one of the UK’s most important exports. About 87% of defence exports come from the combat air industry alone. According to BAE, the Typhoon has returned more than double the UK’s original £12bn investment.

With a potential recession looming, the government has even greater incentive to support the company. BAE Systems employs more than 5,000 people on the Typhoon programme alone in the UK. It supports another 10,000 jobs indirectly.

Not only will this latest contract help secure this, but most of the production will take place in the north of England. For the current government, this is a politically insecure region. They will be keen to support a company that brings jobs to the north.

It is also worth noting that BAE is a steady dividend payer. While its share price is down from the peak earlier this year, its current yield is about 4.8%. This is a nice level for such an established firm.

For me, BAE Systems seems a prime example of a solid, long-term investment. It has a strong brand globally, and doesn’t make headlines or rock the boat. BAE has government support for economic and political reasons and just goes about its business earning money. It’s my kind of share.

The post I think this new contract is positive news for BAE Systems appeared first on The Motley Fool UK.

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Karl has shares in BAE Systems. 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.

Motley Fool UK 2020