Skip to main content
  • rainbow over text: 'thank you NHS'
  • Register
  • Help
  • Contact us
  • Log out of your HL account

BAE Systems - dividend suspended in wake of COVID-19

Sophie Lund-Yates, Equity Analyst | 3 April 2020 | A A A
BAE Systems - dividend suspended in wake of COVID-19

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

BAE Systems plc Ordinary 2.5p

Sell: 492.50 | Buy: 493.00 | Change -14.80 (-2.90%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

BAE said coronavirus had no material impact on the business during the first quarter of 2020. However, at the start of the second quarter it is seeing "more significant disruptions".

In response the group is implementing new cost saving measures, and has suspended the final 2019 dividend of 13.8p. An update on the payment will be provided at half year results on 30 July.

BAE has access to a £2bn revolving credit facility. The first half of the year usually sees a working capital cash outflow - the group's trying to offset this by optimising internal cash flow. The group's also in discussions with key customers to ensure supply chains remain robust.

A large portion of staff members are working from home.

The proposed acquisitions of the Collins Aerospace Military Global Positioning System business and Raytheon's Airborne Tactical Radios business are still expected to complete in the coming months.

The pension deficit is largely unchanged and BAE intends to continue with the funding contributions agreed at full year results.

Due to the uncertainty the group is unable to provide financial guidance for the rest of the financial year.

The shares fell 1.2% following the announcement.

View the latest BAE share price and how to deal

Our view

The pandemic is creating problems.

It's unclear yet if these involve BAE's supply chains or customers. The extent of the damage could depend on how much governments are willing to financially support defence contractors, but at this stage it's hard to say for sure.

The group's in the business of manufacturing and delivering heavy duty military equipment - think fighter jets and aircraft carriers. If the outbreak causes a very severe economic downturn, governments may decide to rein in spending, which could knock some of the wind out of BAE's sizeable revenues.

But we think there are reasons for optimism. A significant portion of existing defence contracts will be deemed critical and should go ahead as normal. That gives the group a great level of visibility over its multi billion pound order book and revenues.

BAE has been enjoying the spoils of President Trump's ramped up defence spending in recent years. The US government is a very good customer to have in our view. Although we're mindful the current US administration hasn't always been the most consistent on policy.

Other nations have been ramping up spending too. After some tough years in global defence markets, BAE has finally seen several large orders come through. Qatar, Canada, and Australia have called on BAE to boost their air forces and navies.

And BAE isn't just about mammoth pieces of kit.

The Cyber & Intelligence business should be an important driver for future growth. The more tech-savvy warfare of the future is also behind BAEs efforts to bolster its second biggest division, Electronic Systems. This department produces "commercial and defense electronics for flight", as well as systems used in electronic warfare, surveillance and communications intelligence.

This area is set to be boosted by the $2bn acquisition of Collins Aerospace's Military GPS business, and Raytheon's Airborne Tactical Radios division. The deal would also increase exposure to American end markets and present an opportunity for cost savings. BAE wouldn't want to see the deals jeopardised. To that end it makes sense to delay a decision on the dividend. The move preserves about £443m of cash, adding a layer of protection in the current climate.

We should point out cashflow is a thorn in BAE's side, and coronavirus isn't helping. It's good BAE still plans to honour a new pension deficit payment plan which should help, but it's one to watch. There's also lingering tension with Saudi Arabia which could threaten a £10bn deal to sell The Kingdom a further 48 Eurofighter Typhoon jets.

Overall BAE's provision of critical services means it's in a defensive position, and we don't think the outbreak has changed its long-run attractions. But we can't rule out ups and downs in the near term. The extent of the damage will depend how long current conditions last, and the amount of the pressure on national budgets.

Register for updates on BAE Systems

Full year results (all figures underlying unless otherwise stated) 20 February 2020

Underlying sales rose 7% to £20.1bn and underlying EBITA - which measures operating profit excluding interest, tax and amortisation charges, rose 5% to £2.1bn. That includes a £50m boost from accounting changes, and growth in all divisions but the smaller Cyber & Intelligence and HQ divisions.

Higher production activity on the new Typhoon and Hawk programme for Qatar helped Air sales rise 11% to £7.5bn. EBITA rose 3.3% to £887m, although return on sales dipped slightly due to last year's one -off benefit for completing the Oman Typhoon contract.

US Platforms and Services saw EBITA increase 27.1% to £267m, reflecting a 6% (constant currency) rise in sales to £3.3bn. The improvement includes the successful ramp up of US combat deliveries during the second half. The division also recorded an order backlog of £5.8bn, compared to £5.4bn last year. BAE expects sales to rise by high-single digit percentages in 2020, reflecting increased volumes from the US Combat Vehicle backlog and ship repair.

Within Electronic Systems sales of £4.4bn were up 7% excluding the impact of exchange rates, driven by growth in the defence business and increased classified activity. EBITA of £687m represented a 15.5% return on sales, at the higher end of BAE's guidance range. The order backlog of £6bn was a record high.

Maritime sales rose 5%, ahead of guidance, to £3.1bn. However the order backlog of £8.6bn was behind 2018's £9bn, as further awards for funding on the Dreadnought submarine programme was offset by weakness in other programmes. EBITA rose 28.2% to £268m.

Cyber & Intelligence sales were broadly flat at £1.7bn, and EBITA dipped £20m to £91m which reflects a restructuring charge in the Applied Intelligence business.

Improved profitability helped free cash flow improve to £850m, compared to £615m in 2018. Net debt fell to £743m (2018: £904m).

At the end of October the group's pension deficit stood at £1.9bn, and a new deficit recovery plan is in place, "under which a one-off payment of £1bn is to be made in the coming months, with approximately £240m of funding payable in the scheme year ending 31 March 2020 and approximately £250m by 31 March 2021." The group intends to raise new debt to make the one-off payment.

Find out more about BAE Systems shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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 disclosure for more information.