BAE Systems: A FTSE 100 Dividend-Raising Star

Published in Company Comment on 13 December 2012

Can BAE Systems' (LSE: BA) dividend continue to beat the wider market?

In an outcome that's tough on investors, the FTSE 100 (UKX) has failed to deliver a rising dividend payout over the last few years.

Just look at the iShares FTSE 100 ETF (LSE: ISF), for example. This is an exchange-traded fund that tracks the benchmark index, and we can see the aggregate payment from Britain's top 100 companies has yet to regain its pre-recession peak:

Dividend per share19.1p20.2p17.1p16.2p18.1p

But some companies within London's premier index have performed well on dividends, despite these austere times, and this series aims to seek them out. One such name is BAE Systems (LSE: BA).

The big question is can the company's dividend continue to out-perform its index. Let's take a closer look.

BAE Systems is one of the world's biggest weapons and aviation groups. With the shares at 339p, the market cap is £11,019 million. This table summarises the firm's recent financial record:

Revenue (£m)14,30916,67120,37420,98017,770
Net cash from operations (£m)(1,240)(1,095)1,630962482
Adjusted earnings per share30.1p37.1p40.7p42.4p45.5p
Dividend per share12.8p14.5p16p17.5p18.8p

So, the dividend has increased by 47% during the last five years -- equivalent to a 9.6% compound annual growth rate.

After the company's failed attempt to merge with Franco-German player EADS during 2012, it's business as usual at BAE Systems. Thanks to tightening government budgets that means operating in a difficult trading environment in its largest US and UK markets. The firm is a global defence, aerospace and security company employing around 93,500 people worldwide. Its products and services include air, land and naval forces requirements such as advanced electronics, security, information technology and support services. The company supplies many of the world's fighter planes, radar, attack missiles, warships and munitions.

Last year, around 32% of revenue came from its Platforms & Services UK division; 28% from the US division and 20% from the International division; 13% from the area of Electronic Systems and 7% from Cyber & Intelligence. Dividend growth has been steady but the defence budgets of national governments have been under pressure recently. I think it's unclear whether BAE's dividend will feel such pressures going forward.

BAE Systems' dividend growth score

I analyse four different features of a company to judge whether its dividend can continue to rise:

1. Dividend cover: earnings covered last year's dividend around 2.4 times. 4/5

2. Net cash or debt: at the last count, net gearing was around 33%. 4/5

3. Cash flow: falls short of earnings and is trending down. 1/5

4. Outlook and recent trading: satisfactory recent trading; a cautious outlook. 3/5

Overall, I score BAE Systems 12 out of 20, which causes me to believe the firm's dividend may struggle to continue out-pacing dividends from the FTSE 100.

Foolish summary

Positives include modest debt and a dividend well covered earnings. Cash flow seems to struggle to keep up and the outlook statement lacks punch - I'm cautious on BAE System's prospects.

Right now, the forecast full-year dividend is 19.96p per share, which supports a possible income of around 5.9%. That's pretty fat but will it grow? BAE can stay on my watch list, for now.

BAE Systems is one of several dividend out-performers on the London stock exchange. There's one man who's as keen as I am to find, and invest, in them. I suggest you read all about his best investment ideas now in this free, time-limited report, while you have the chance: 8 Income Plays Held By Britain's Super Investor. This free report analyses the £20 billion portfolio of legendary high-yield expert Neil Woodford. Click here to discover his favourite dividend opportunities with good growth potential.

> Kevin does not own any shares mentioned in this article.

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DIYIncome 14 Dec 2012 , 8:18am

Thanks Kevin - an interesting article. Apart from the bit at the end, of course...

I'm holding BAE with a reasonable yield and showing a slight capital gain but the trend in cash is a warning. Still, there is still a lot of instability around the world (Syria, N.Korea, Iran, China) that mean that the US, UK and other governments cannot hold off military preparedness.

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