BAE Systems‘ (LSE:BA.) shares have proven to be an excellent source of passive income down the years. Like any stock, this FTSE 100 company comes with risk. But its excellent earnings visibility and strong cash flows gives it the means to consistently pay a decent dividend.
Created with TradingView
As the chart above shows, BAE Systems’ annual dividend has risen every year since the early 2000s. Payouts continued to rise even during the 2008 financial crisis and, more recently, the Covid-19 pandemic. Very few global shares have managed the same thing.
City analysts expect this trend to continue. In fact, the defence giant’s tipped to keep lifting cash rewards all the way through to 2026, at least.
Year
Dividend per share
Dividend growth
Dividend yield
2024
32.33p
8%
2.5%
2025
35.30p
9%
2.7%
2026
38.47p
9%
2.9%
However, dividends are by no means guaranteed. And past performance isn’t a reliable guide to the future. With this in mind, how realistic do current dividend forecasts look? And should I buy BAE Systems’ shares for my portfolio?
In good nick
The first part of my analysis is quite encouraging. For a variety of reasons, the firm’s predicted dividends through to 2026 look highly achieveable.
To begin with, estimated payouts are covered between 2 times and 2.2 times by expected earnings over the period. Any reading above 2 times provides a wide margin for error, in the event that profits come in lower than predicted.
This is important for defence stocks. Supply chain problems remain a huge issue at the minute, threatening potential revenues. On top of this, contract timings in the arms industry can be notoriously lumpy, affecting earnings from year to year.
Great dividend cover isn’t the only reason to be optimistic over future dividends either. BAE Systems has strong cash flows it can use to keep growing rewards even if the bottom line comes under pressure.
Net debt’s grown to £6.1bn following the acquisition of Ball Aerospace in February. This will be worth keeping an eye on but right now, the balance sheet still looks pretty robust.
Buy or no buy?
Created with TradingView
Things are looking good for dividend income in the short-to-medium term then. But this alone doesn’t make BAE Systems a stock to buy.
When investing, I look for companies that might provide solid capital appreciation as well as a decent and growing passive income. And I’m seeking ones that can deliver this over the long term, say 10 years and more.
Pleasingly, I think BAE Systems looks good across all these criteria. Its share price has more than trebled during the past decade, driven by soaring arms sales following Russia’s invasion of Ukraine in 2022.
I’m expecting the share price to keep on ascending. Why? Well defence analysts expect weapons spending to continue rising too, amid growing fears in the West over Chinese and Russian expansionism, and the growing conflict in the Middle East.
Researchers at Zion Market Research, for instance, expect the aerospace and defence industry to expand at an annualised rate of 8.2% between 2023 and 2032.
With its expertise across multiple product classes, and its top supplier status with the US and UK, BAE Systems could be one of the best stocks to consider to capitalise on this opportunity.
The post Here’s the dividend forecast for BAE Systems shares through to 2026 appeared first on The Motley Fool UK.
Should you buy BAE Systems now?
Don’t make any big decisions yet.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.
And he believes they could bring spectacular returns over the next decade.
Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows…
When such enormous changes hit a big industry, informed investors can potentially get rich.
So, with his new report, Mark’s aiming to put more investors in this enviable position.
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
More reading
Just 1 FTSE 100 stock for 10 years of passive income? Here’s what I’d buy
Should I buy more BAE Systems shares in September?
2 FTSE 100 stocks I’d buy for passive income during a recession
If the UK stock market crashes I’d buy shares of this FTSE 100 company
Despite strong H1 results, BAE Systems’ share price has dipped 8%, so should I buy more?
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended BAE Systems. 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.
