ii view: BAE reinstates the dividend payment

Covid has impacted, but in an uncertain world is exposure to defence increasingly sensible?

First-half results to 30 June

• Adjusted revenue up 4% to £9.9 billion
• Adjusted earnings per share down 15% to 18.7p 
• Paying both a deferred 2019 dividend of 13.8p per share in September
• And a 2020 interim dividend of 9.4p per share in November

Guidance:

• Expect adjusted earnings per share to be a mid-single digit percentage lower than last year's 45.8p

Chief executive Charles Woodburn said: 

“We have delivered a robust performance in the first half of the year, thanks to the efforts of all of our employees. We started the year from a strong position and we have taken actions to enhance our resilience, ensuring we continued to deliver against our customer priorities, whilst keeping our employees safe.

"Assuming no significant Covid-19 resurgence, we expect a good second half to the year. Demand for our capabilities remains high and we recognise our role not only in supporting national security, but also in contributing to the economies of the countries in which we operate. "

ii round-up:

Arms manufacturer BAE Systems (LSE:BA.)today flagged an expected fall in full-year 2020 profits given first-half Covid disruption, but reinstated dividend payments given an expected return to near normal trading over the second half. 

A 15% fall in first half earnings due to pandemic disruption and lower volumes of products such as electronic systems for passenger planes is expected to hit the full-year outcome. But an expected solid second-half now gives management the confidence to recommence dividend payments. 

BAE shares rose by more than 5% in early UK trading and are up over 10% since the UK’s lockdown begun in late March. Shares for rival QinetiQ Group (LSE:QQ.) are up by a similar amount while shares for Babcock International (LSE:BAB) are down by over 10%. 

BAE products include jet fighter components, navy guns and radar. Its Air division which contributes towards both the American’s F-35 fighter and Europe’s Typhoon jet, remains its biggest by sales, generating around a third of annual revenues.

Having deferred a decision on the 2019 final dividend, it is now paying 13.8p per share come September. It also declared a 2020 interim dividend of 9.4p per share payable in November assuming no new sizeable pandemic disruption. 

In January, it agreed business acquisitions from both Raytheon and United Technologies. Each has sold businesses in order for the US government to wave through their merger. Including both purchases, full-year sales are expected to grow by a low-single digit percentage. 

Increased volumes in F-35, combat vehicles and growth in electronic defences should offset falls for commercial passenger plane systems.

During the pandemic, BAE used its 3D printing capabilities and supply chain contacts to donate more than 150,000 items of Personal Protective Equipment (PPE) to healthcare workers in the US and the UK.

ii view:

BAE employs over 85,000 personnel across 40 countries. The defence industry 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 its products 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, the strain on government finances under measures to address the pandemic and possible resulting defence spending cuts further down the line warrant consideration. But for now, an escalating cold war between the US and China and still fraught relations with Russia offer a positive if undesired backdrop. Add in a now reinstated dividend and a historical income yield of over 4% (not guaranteed), and BAE looks to be justifying its place in a balanced and diversified investment portfolio. 

Positives: 

• Order backlog of £46.1 billion
• Recommencing dividend payments

Negatives:

• Exposure to commercial aerospace electronic systems
• Pandemic is now stressing government borrowing levels

The average rating of stock market analysts:

Buy