Slow and steady over the next two years is hoped for from Europe's biggest defence contractor.
Cuts in defence spending have hit sales at BAE Systems (LSE: BA), which reported full-year results for 2011 today.
With the company's two main customers, the USA and the UK, cutting back on buying weaponry, and third-place Saudi Arabia still being hit by delays in a key jet order, overall revenues for the year were 14% down on 2010, at £19.2bn.
Observers reacted with apparent dismay, sending the shares crashing by 4% in early trading. However, at the time of writing, they're back up to 324p, for a more modest 2.5% fall, so is it possible things aren't as bad as they first appeared?
A 5.6% dividend
Despite sales being down, which was really not unexpected, earnings before interest, tax and amortisation came in pretty much bang on analysts' expectations, at £2.03bn, and underlying earnings per share (eps) were largely unchanged at 39.7p.
A full-year dividend of 18.8p was announced, which was exactly what the City was expecting, and is 7% up on last year -- and on yesterday's closing share price, it represents a yield of 5.6%, which is really nothing to complain about.
But the firm's order book is down, standing at £36.2bn from the £39.5bn level of 12 months previously, with the failure to progress with a bid for a £6bn fighter plane contract with India not having helped.
How about the outlook for next year? After telling us that BAE is facing tough conditions, chief executive Ian King went on to say:
"While little sales growth can be expected for the group in 2012 in the current market conditions, modest growth in underlying earnings per share is anticipated."
Now that might not be a bullish growth message and, with UK defence spending set to fall by 8% over the next four years, there isn't going to be any sudden upturn. And the mild optimism does depend on the Saudi plane deal going ahead according to plan.
But the raising of the dividend for 2011 does suggest confidence in the long term, and I think it's likely that payouts can be maintained over the next two to three years. BAE knows it is in a cyclical business that needs continuous R&D, and keeps its dividends well covered -- even the latest is around twice covered. So if it can keep paying out around 5.5% a year, I think the shares still look pretty decent value for the longer term.
What do you think? Please do share your opinions below.
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