BAE Sales Down, But Dividends Up

Published in Company Comment on 16 February 2012

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.

The future?

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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NikThomas 16 Feb 2012 , 12:37pm

The 4% crash was today's reaction, but the shares are still above any close in the past few months except last night's - there was a big spike ahead of the results yesterday.

With a £30Bn forward order book, I'm hoping that the dividends from my employee schemes will keep rolling in, although I do tend to sell off shares as they mature in order to stop my portfolio becoming unbalanced.

merchantprince00 16 Feb 2012 , 2:28pm

Issue for me is that the headline profit and earnings per share aren't matched by cashflows which halved and are now less than earnings.
Company has taken steps by what looks like a restructuring of debt from short to long term, which has increased net debt, but has brought interest payments down.
But the shortfall in cashflows compared to earnings means that £672m of company cash has been used to make up the difference creating a cash burn situation for the second year running (2010: £915m)
Likely to be a timing issue but at some stage has to be realised with cash inflows or brought back to reality as company cash is used up and/or finance charges increase.

ukvalueinvestor 16 Feb 2012 , 3:20pm

I've owned BAE for a while now. I don't see any obvious damage to the company's long term value so assuming the dividend is safe it still looks like a good choice to me.

Jimi97 16 Feb 2012 , 6:07pm

I sold at 370p, but failed to spot the bottom at 250-255p (three times over). Although I think the bad news was already largely priced in - hence the bounce today - there is no real reason why the price should not head south once more. For me, the downside risk is too big and the upside opportunity too doubtful. However, the dividend yield is attractive and does something to limit the downside.

Hannibalis 17 Feb 2012 , 2:04pm

This Lord of War seems a good dividend play - but Merchantprince00 makes a good point - watch the cashflow. For me, a cautious HOLD

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