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Why I think the BAE share price is a steal

Tom Rodgers
·4-min read
BAE Systems
BAE Systems

The BAE Systems (LSE:BA) share price is now 28% cheaper than its 2020 peak. And I think the FTSE 100 stalwart could offer me remarkable long-term value at these levels. Let me tell you why.

Demand for BAE products remains extremely strong. Given BAE’s size and strength, its sales numbers are mind-bogglingly high.

On 12 November 2020 for example, BAE announced it had won a £1.2bn contract to engineer components for 38 Eurofighter Typhoon combat aircraft for the German Air Force.

Military intelligence

As well as being a reliable income stream to bolster the BAE share price long term, the military is an important sector because world governments are continually innovating and upgrading their systems. This only allows BAE to sell products consistently year after year.

It also means that BAE is able to re-engineer battlefield tech to develop new product lines.

Let’s take drones, for example. BAE’s unmanned aerial vehicles were first developed as combat systems with a £185m investment in 2013. That produced the Rolls-Royce engine-powered Taranis drone.

Out of that innovation today we have the BAE Systems PHASA-35, an aerial craft that flies in the upper reaches of the earth’s atmosphere and can be used to boost communications networks, help beam 5G to the ground, or aid disaster relief efforts worldwide.

It’s not very snappily named, but it is an impressive piece of kit.

With a 35-metre wingspan and a solar-powered electric engine, the PHASA-35 can remain in flight for 12 months at a time.

And it might sound like sci-fi, but as the BBC reported in November, Germany plans 5G drone trials by 2024.

BAE share price future

The BAE share price is trading at a particularly cheap P/E ratio of 10.3, well below the FTSE 100 average. So now could be a great time for me to buy in for the long term.

The company also offers a plump 5% dividend yield, which I really like.

I wrote almost exactly 12 months ago that the BAE share price represented the best of UK defence prospects. While the shares have dipped 10% from that point in time, my view has not altered one iota.

That’s because the future looks strong. The $2bn buyup of Raytheon’s Airbone Tactical Radios division gives BAE more chance to expand its US division. And the US is one of the world’s largest military spenders.

Flying ahead

More than half of the FTSE 100 delayed dividends in the face of Covid-19. And the BAE share price was hit when the defence giant did the same in April. But I saw this as a prudent cost-control measure with all the uncertainty around.

However, defence contractors qualified as key workers throughout the pandemic. So orders still flowed throughout the period and factories continued operating. And I believe BAE has seen off the worst of the disruption.

A November trading update revealed underlying earnings per share were better than expected. “Demand for our capabilities remains high with order intake ahead of our original pre-Covid planning,” the company noted.

So it was no surprise to me when 2019’s 13.8p final dividend returned in full in September. CEO Dr Charles Woodburn also raised the 2020 interim dividend by 4.4% to 9.4p per share. This is due to be paid on 30 November.

In an uncertain world, an investment in BAE is an increasingly attractive and sensible option, in my view. It’s on my watch list.

The post Why I think the BAE share price is a steal appeared first on The Motley Fool UK.

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TomRodgers 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.

Motley Fool UK 2020