BAE Systems‘ (LSE:BA.) share price has been on a tear. Last month, it crossed the 1,000p mark.
I’ve covered the shares on numerous occasions over the last year and I’ve always been quite bullish on them, given the supportive backdrop. Are they still worth buying now that they’re trading above 1,000p? Let’s take a look.
Trading at premium to the market
Let’s start with the valuation here to set the scene. For 2023, analysts currently expect BAE Systems to generate earnings per share (EPS) of 59.1p.
This means that at the current share price of 1,014p, the forward-looking price-to-earnings (P/E) ratio is 17.2. That’s higher than the market average. At present, the median forward-looking P/E ratio across the FTSE 100 index is about 13.8.
In other words, BAE Systems shares trade at premium to the UK market. So is the stock worth this above-average multiple?
Business momentum
Well, one reason it could be is that BAE operates in an industry that is pretty secure right now. Given the high level of geopolitical tension globally, governments are spending heavily on defence.
And the company is benefiting. For example, last month it landed:
A US Navy C4i (command, control, communications, computers, and intelligence) support contract worth $537m
A US Defense Advanced Research Projects Agency contract worth $8.3m
An F-35 jet maintenance support contract worth £161m alongside Lockheed Martin
Meanwhile, at the end of 2022, the company had an order backlog of nearly £60bn.
So the company has momentum right now.
Earnings growth
Another reason the stock could be worth a premium is that both revenue and earnings are expected to increase significantly this year.
Last year, BAE Systems posted revenue of £21.3bn and earnings per share of 55.5p. This year however, analysts expect the group to post revenue of £24.2bn and, as I mentioned earlier, EPS of 59.1p.
That equates to top- and bottom-line growth of 13.6% and 6.5% respectively.
This is encouraging considering that businesses in many other industries are facing an earnings slowdown right now.
Reliable dividends
A third reason the stock could be worth an above-average multiple is that it’s a reliable dividend payer with an attractive yield.
BAE Systems has increased its payout every year over the last decade. This puts it in an elite group of FTSE 100 stocks.
And with analysts expecting a payout of 28.9p per share for 2023, the prospective yield here is about 2.9% currently. Dividend coverage (a gauge of dividend sustainability) is forecast to be around two.
This kind of dividend setup is worth paying for, to my mind.
My view
Putting this all together, my view is that BAE Systems are still worth buying today.
Having said that, the higher valuation does add some risk. Compared to when the stock was trading near 850p at the start of the year, there’s less of a margin of safety now.
Therefore, I wouldn’t be loading up on the shares right now. If I was looking to buy the stock today, I’d be having a nibble now and then wait for a pullback to build my position.
The post BAE Systems’ share price is above 1,000p. Is the stock still worth buying? appeared first on The Motley Fool UK.
Should you invest £1,000 in BAE Systems right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BAE Systems made the list?
See the 6 stocks
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
3 gold nuggets to hold in a Stocks & Shares ISA for long-term growth
A FTSE 100 share I’d buy with my last £2,000!
Will BAE Systems shares go stratospheric on new orders?
Are BAE Systems shares still cheap at £10? Here’s what the charts say
BAE Systems shares at record highs! Should I buy in before it’s too late?
Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.