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BAE - 2016 another good year

George Salmon | 23 February 2017 | A A A
BAE -  2016 another good year

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BAE Systems plc Ordinary 2.5p

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A currency tailwind is behind a £1bn increase in BAE's revenue to £17.8bn, while operating profits rise 16%. The full year dividend is 2% higher, at 21.3p. The shares rose 2. 5% on the news.

Our View

2016's explosive political events have significant read-across for BAE.

The sell-off in sterling after the Brexit vote has added extra value to the group's significant overseas revenues, and Donald Trump's victory in the US election has raised hopes that a series of bumper orders could be on the way.

In the run-up to the vote, Trump consistently spoke of the need to expand the US military budget. So while global tensions are low by historic standards, and significant military action thankfully appears some way off, hopes are high that BAE will still benefit from an increase in spending.

In the wider context, defence markets have been tough for years, so we could see some improvement as austerity eases. However, while the US president may still be fond of hulking machines that make big explosions, the nature of modern warfare might have leapfrogged modern weaponry. A laser guided missile is little use against a cyber-threat. A battle tank is a tad blunt against an insurgency, whilst jet fighters are only really needed if your opponent has them too.

Defence companies will never be redundant, we fear, but we may be at an inflection point, where their traditional weapon platforms, tanks, jets, subs and missiles, are less important than data processing and surveillance capabilities. The Cyber & Intelligence business, which deals with cyber security, both national and commercial, is an area BAE is keen to grow, but it may be a while before this division makes a substantial contribution to group profit.

For the time though, the group's £42bn order backlog and established long-term relationships with the US, Saudi Arabia and the UK government give the group excellent revenue visibility, which should support the dividend. BAE offers investors a prospective yield of 3.6%, with analysts expecting both the dividend and earnings to increase steadily in the coming years although there are no guarantees.

Full year results:

In Electronic Systems, which produces and develops a range of hi-tech military equipment, sales and the order backlog were both broadly unchanged in constant currency terms, at £3.3bn and £5.2bn respectively. Contract awards included the F-35 Lightning II electronic warfare systems and the F-15 Eagle Passive Active Warning Survivability System. Operating profits in the division were £474m.

The Cyber Security & Intelligence division generated £59m of operating profits, with Applied Intelligence achieving double-digit order intake and sales growth.

Operating profits in the group's Platforms & Services, which includes vehicles and weapons for military use on air, land and sea, rose in all three regional divisions. UK operating profits were £780m, with £182m in the US and £365m internationally as higher revenues and favourable exchange rates provided a boost. The renewal of the five-year support contract in Saudi Arabia helped International order intake double to £6.2bn.

Looking ahead, BAE believes that there are signs that the US defence budget could be returning to growth. The group is confident long term relationships with the UK, Saudi Arabia and Australia will be developed further.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.