Interactive Investor

BAE Systems: will share price reflect management confidence?

19th May 2021 09:26

Lee Wild from interactive investor

Operating in an increasingly unfashionable sector helps explain the dull share price performance.

Just over five months into the new financial year and BAE Systems (LSE:BA.) is still on track to hit targets for revenue, margins and cash. 

Most of its divisions, including Air, Maritime, Electronic Systems and Intelligence and Security are still going strong, it’s building enough combat vehicles to meet agreed schedules, and its US ship repair business is making up for lost time during the pandemic.

There’s comfort at the size of BAE’s order book, and new orders, led by Dreadnought submarine funding of £848 million, have exceeded expectations. As always, there’s plenty for governments to spend their vast military budgets on, and many of BAE’s biggest customers plan to pump even more cash into defence. The US, Germany, France and Australia are big opportunities for BAE.
Strong free cash flow means BAE should continue returning cash to shareholders in the form of generous dividends for the foreseeable future. 

 If you strip out the rapid V-shape recovery after last October’s price slump, BAE shares have moved sideways for an entire year. Concerns about a pension deficit haven’t helped. A possible new funding regime for final salary scheme is being considered by the UK regulator. It is currently out for consultation, but a revised code could come into force towards the end of 2021.

However, we’re told today that higher bond yields and asset values have driven ‘material reductions’ to both its funding and accounting deficits since year-end. It has also completed its UK pension deficit funding programme.

BAE operates in an increasingly unfashionable sector, which helps explain the dull share price performance. There is a growing risk that BAE shares are excluded from more and more funds as an increasing number of managers use ethical considerations to make investment choices. No ESG fund will buy a company making war machines.

While encouraging, there’s little in this update to suggest a significant improvement in the share price is imminent.

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