BAE Systems (LSE: BA) is a winning income stock with a dividend yield of 4.5%, however, over the last 12 months the shares have moved -22.3% relative to the wider market. Will 2 big new contracts push BAE Systems’ share price into the black?
So why is BAE Systems so great?
BAE Systems is the leading British security and defence company that handles £1.3billion contracts over the past half a decade. What is making them extra hot right now is two new contracts with the Ministry of Defence.
BAE Systems is a pretty safe investment due to its colossal size. The company has a market valuation of over £1 billion on the LSE with a current market capitalisation of around £16 million.
The defence industry is highly regulated and controlled so only a few companies effectively control the market. BAE Systems is by far the largest in the UK and one of the top five weapons producers in the world. Its sales are double that of its closest European competitor, Airbus Group. Also, the company also has unrivalled experience in specific sectors, such as shipbuilding.
Limits to their success
BAE Systems’ stock was trading at GBX 539 in March 2020 when the coronavirus pandemic began. Since then, BA shares have decreased by 2.3% and is now trading at GBX 526.80.
Although things are looking good, there is one thing to watch out for… With the pandemic taking its toll on the UK’s public finances there is almost definitely going to be a cut in defence spending which will affect BAE Systems performance as they have such close ties to the Ministry of Defence.
With ESG investing becoming more important than ever, BAE Systems might be in some trouble. Their dealings supplying arms to Saudia Arabia is far from the socially responsible image that companies nowadays need to uphold to guarantee safe investment. If investors avoid BAE Systems then their share price might enter rough waters.
Should you buy?
Overall, the company provides a solid return for investors and are unlikely to be largely affected by these risks.
Although it’s hard to see how uncertain economic conditions will affect the stock’s future performance, we can trust analysts to make well-placed market predictions.
The current consensus among 20 polled investment analysts is to buy stock in BAE Systems PLC.
According to analysts’ consensus price target of GBX 596.56, BAE Systems has a forecasted upside of 13.2% from its current price of GBX 526.80. 11 analysts have issued 1 year price objectives for BAE Systems’ stock ranging from GBX 511 to GBX 660 to give an average of GBX 596.56 in the next twelve months. This suggests a possible upside of 13.2% from the stock’s current price.
BAE Systems, a great income stock
BAE Systems is a great income stock offering a dividend yield of 4.5% and a dividend cover of 1.25.
BAE Systems pays an annual dividend of GBX 24 per share and currently has a dividend yield of 4.64%. BA has a dividend yield higher than 75% of all dividend-paying stocks, making it a leading dividend payer. The dividend payout ratio of BAE Systems is 59.26%. This payout ratio is at a healthy, sustainable level, below 75%.