Is BAE Systems still a good dividend pick after a 35% share price rise?

BAE dividend

I added BAE Systems (LON:BAE) (BAE.L) shares to my portfolio back in January 2015. At the time, the shares were trading at around 480p and the yield on offer was a generous 4.3%.

However, in the last year or so, BAE Systems shares have rallied from under 500p to 670p, boosted by the weaker pound and a lift in sentiment after the appointment of Donald Trump as US President. So after a 35% rise in the share price in twelve months, is the stock still a buy?

Defence theme

I was bullish on defence when I bought BAE Systems and I’m still bullish on defence as a theme. In today’s world of enhanced geopolitical uncertainty, can governments afford to cut back on defence spending? I personally don’t think so. Indeed, Trump wants to spend an extra $54 billion on defence in 2018 alone, and that budget increase should provide a nice tailwind for defence contractors such as BAE Systems. Chief Executive Ian King stated in February “with an improved outlook for defence budgets in a number of our markets, we are well placed to continue to generate attractive returns for shareholders.

I also like the fact that BAE Systems has exposure to cyber security. While the division only makes up a small proportion of revenues at present, I believe this is a huge growth area going forward.

So the company certainly looks interesting from a long-term story point of view, but is the stock a good dividend investment right now?

Low historical yield

BAE’s dividend payout last year was 21.3p, which at the current share price, equates to a yield of 3.2%. A glance at the company’s historical yield, reveals that’s very close to the lowest yield the company has offered over the last five years. Dividend growth last year was just 1.9%, which while better than no growth, is not fantastic.

A yield of that level can be attractive if the payout is growing at a strong rate. For example, if the yield was 3.2% and growing at 15% per year, that would be a completely different story.

But with growth of less than 2% over the last two years and growth of around 3.2% forecast for this year and next year, I’m not seeing a great deal of value from a dividend perspective right now.

For this reason, I believe it might be worth waiting for a better buying opportunity here. With earnings set to pick up this year, the stock doesn’t look outrageously expensive on a P/E ratio of 15.4, but I don’t think I would add to my position at the current share price.

Disclosure: Edward Sheldon, CFA owns shares in BAE Systems. 

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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