ii view: BAE predicts further growth in 2020

Earnings up, debt down and pension funding being addressed - investors have been taking a closer look. 

Full-year 2019 results 

• Sales up 7% to £20.1 billion
• Adjusted profit up 5% to £2.12 billion
• Underlying earnings per share up 7% to 45.8p
• Net debt fell by 18% to £743 million
• Total 2019 dividend up 4.5% to 23.2p per share

Guidance:

• Underlying earnings per share for 2020 are expected to grow by a mid-single digit percentage

Chief executive Charles Woodburn said:

"2019 has been a year of significant progress for BAE Systems. We delivered a good set of financial results in line with guidance, growing sales and earnings, with improved operational performance and increased investment in the business to underpin our growth outlook. 

“Strategically we took a number of actions to strengthen the portfolio and the pensions agreement announced today is good for all stakeholders. These will help to accelerate our strategy and further our growth outlook. We have a large order backlog and remain focused on strong programme performance to deliver a sustainable business model with enhanced financial performance."

ii round-up:

Arms manufacturer, BAE Systems (LSE:BA.), posted results which met city forecasts and predicted further earnings growth for the current year. 

The maker of jet fighters, armoured vehicles and nuclear subs delivered 2019 earnings per share growth of 7% and guided investors towards similar upside over 2020. 

The shares rose by more than 2% in afternoon UK trading. 

Its Air division, which includes production contributions towards both the American’s F-35 fighter and Europe’s Typhoon jet, remains its biggest by profits, generating around 42% of the full year total. 

Management shrugged off concerns over a 2019 German government ban of weapon sales to Saudi Arabia. 

BAE, which employs over 85,000 personnel across 40 countries, also announced plans to speed up payment into its £1.8 billion underfunded staff pension scheme. 

Full-year 2020 guidance excludes the impact arising from its two January agreed business acquisitions. Both Raytheon and United Technologies are selling a business each in order for the US government to wave through their merger. 

ii view:

Defence is driven by politics and government appetite for spending. As such, it is somewhat volatile in nature with order flow difficult to predict. 

Along with a diverse product range, BAE also attempts to sell to a wide array of countries. The US, the UK and Europe rate high in its ranks, as does the now politically scrutinised Saudi Arabia, following the death of journalist Jamal Khashoggi, allegedly by the Saudi government.

For investors, while the estimated dividend yield of around 3.6% (not guaranteed) is below the FTSE-100 index average of over 4%, earnings cover of two times and 15 years of consecutive dividend growth cannot be overlooked. That said, a share price rise of over 16% since the start of the year alone does offer some caution.  

Positives: 

• Order backlog of £45.4 billion
• Progressive dividend policy

Negatives:

• Utd Technologies merging with Raytheon creates $120 billion all-US rival
• Major customer, Saudi Arabia, remains under international scrutiny 

The average rating of stock market analysts:

Buy