The BAE (LSE: BA) share price has been a rare bright spot on the FTSE 100 in 2022, climbing 50% year-to-date. It’s a sign of the times, sadly. The aerospace and defence contractor’s main business is selling weapons, and business is booming.
This isn’t a one-off due to war in Ukraine and tensions with China. BAE shares have been steadily climbing for years. I’ve been taking a few risks with my portfolio purchases lately, buying dirt-cheap dividend income stocks like housebuilder Persimmon and Lloyds Bank on low single-digit valuations. Should I balance this by purchasing a stock that is actually on the up?
The share price is rocketing
BAE shares trade at 17.27 times earnings and yield 2.99%. That looks attractive to me. I actually expected the valuation to be higher and yield lower, given recent share price success.
One big attraction is that defence programmes tend to be long-term commitments, and purchases require ongoing support. BAE has a large backlog of work, and orders today will generate revenues for years or decades to come. The work keeps coming. New orders have topped £28bn this year. It’s hard to imagine that going into reverse in 2023, with the company reporting “robust” commitment to defence purchases among customers.
BAE’s revenues have been growing slowly and surely for years, ratcheting up from £17.22bn in 2017 to £18.52bn in 2021. Profits have displayed a similarly trajectory.
Management expects another year of “top line growth and margin expansion” in 2023, with sales up across all sectors. Since global peace seems unlikely to break out in the near future, there’s little reason to dispute that. The stock could easily grow another 50% next year. BAE shares would presumably take a knock if Russia and Ukraine entered peace negotiations, but sadly, it looks more likely that the war will drag on.
Geopolitical uncertainty is not the only reason BAE is doing so well. It has also been lifted by the weaker pound, which has boosted the value of its overseas earnings once converted back into sterling. That tailwind may soon ease, though. After former Chancellor Kwasi Kwarteng’s mini-Budget, there was talk of the pound falling to parity with the dollar. Now it’s above $1.22.
I’m targeting other FTSE 100 stocks
The outlook for the BAE Systems looks bright, so should I buy it? The stock would sit handsomely in my portfolio. It isn’t too expensive either.
There’s one thing stopping me. Right now, there are a whole heap of FTSE 100 companies that excite me more. Not because they’re better run, or have brighter prospects. Often, the reverse is true. I’m currently loading up on stocks that have a bad time of it in 2022, in the hope of hoovering them up at bargain prices (and with high yields).
Since I invest for a minimum 10 to 15 years, time is on my side. I can bag them at a low entry price, reinvest any dividends to purchase more stock, then sit back and wait for the recovery. That is my strategy today, and BAE doesn’t fit into it.
Which is a shame, because it’s a great company. Can’t buy ’em all, though.
