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BAE - dividend raised and buybacks announced

First half underlying revenue rose by £546m to £10.6bn reflecting growth in all segments.

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First half underlying revenue rose by £546m to £10.6bn reflecting growth in all segments. Underlying operating profits rose 8.2% to £1.1bn, ahead of consensus.

Full year guidance is unchanged with sales growth of 2-4% and underlying operating profit growth of 4-6%.

The group announced a 10.4p interim dividend, a 5% increase, and a share buyback programme of up to £1.5bn to be completed over the next three years.

Shares fell 1.3% following the announcement.

View the latest BAE share price and how to deal

Our view

Given BAE is in the defence business, the current crisis is having a positive effect on BAE's growth, as it expects key customers to increase defence spending (more on that later). All-in-all, BAE is doing well.

The group's primarily in the business of manufacturing and delivering heavy duty military equipment - think fighter jets and aircraft carriers. A significant portion of existing defence contracts are deemed critical, and that gives BAE great visibility over its multi-billion-pound revenues. Now that the US and UK have confirmed their commitment to maintaining defence spend, that path is even clearer. Especially given the "increased threat" environment as BAE describes it.

The group's using some of its financial firepower to accelerate research & development spend. This is a good move in our view as defence spending across the world continues to balloon and the group looks to improve its portfolio.

BAE's also been funnelling some of its cash into strategic acquisitions in key growth areas. Military training software firm Bohemia Interactive Simulations, acquired in March, is already driving growth within Cyber & Intelligence. This part of the business is responsible for just a fraction of BAE's total revenue right now, but could become a much more vital growth engine moving forward.

Cash flow has historically been a thorn in BAE's side, but we were pleasantly surprised to see continued progress. Working capital management coupled with strong profits means this is the second year running that cashflow is in the black.

Costs are facing pressure from supply chain disruption, but for now we're happy to give BAE the benefit of the doubt when it says it's offsetting the worst of the financial impact.

BAE's position as a critical defence supplier should continue to hold it in good stead. Reliable revenue streams are a very enviable asset in the current environment, and help underpin a prospective dividend yield of 3.5%. Please remember no dividend is ever guaranteed. Ultimately, we think BAE's in good shape to deliver on its long-term growth strategy and the market appears to agree with a valuation some way above the long-term average.

BAE key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

The author holds shares in BAE plc.

Half Year Results (all figures underlying unless otherwise stated)

Despite persistent supply chain issues, Electronic Systems saw sales rise 6.3% to £2.3bn. This fed into a £24m increase in operating profits with margins broadly stable year-over-year. Strong demand for F-35 Precision Strike and C4ISR capabilities helped the order backlog rose from £6.6bn to £7.7bn.

Platforms & Services posted 2.7% sales growth to £1.6bn. Taking exchange rates into account, this was a 3% decline driven by lower US ship repair volumes. Operating profits rose 33.9% to £146m as efficiency investments paid off with more profitable operations in ship repair and combat vehicles.

With F-35 production rates at full capacity and Tempest combat air systems technology maturing, sales rose 3% to £3.5bn in Air. The group's made progress toward delivering its first Typhoon aircraft in Qatar in the second half. Profitability was stable, leading to a £2m uptick in operating profits to £362m.

Maritime sales rose 6.3% to £2.2bn driven by volume increases on Dreadnought submarines and Type 26 naval ships. Profitability fell which meant operating profit was broadly flat at £182m, reflecting last year's strong performance due to risk releases.

Strong growth in Digital Intelligence and the US Intelligence & Security businesses helped Cyber & Intelligence sales rise 11.2% to £1.1bn. Profitability improved substantially, feeding into a 26.8% increase in operating profits to £123m.

Free cash flow was down from £461m to £123m, primarily due to the impact of asset sales last year. Net debt rose £975m from the start of the year to £3.1bn.

Find out more about BAE Systems shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.

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Written by
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 28th July 2022