Russia’s prolonged invasion of Ukraine has turned AAA-rated BAE Systems (GB:BA) from banished ‘sin stock’ into one of the UK’s top 10 most-favoured shares with the world’s best-performing fund managers whose investments Citywire Elite Companies tracks.
Like its peers in the aerospace and defence sector, BAE Systems was for years high on the list of exclusions for investors pursuing environmental, social and governance (ESG) mandates. The group, founded in 1979, is one of the world’s biggest defence contractors making, among other things, submarines, drones and fighter jets. It also supplies munitions and has a growing expertise in electronic and cyber warfare.
BAE Systems is based in the UK, where its shares are also listed. It is a big contractor for the UK’s Ministry of Defence, but does around 40% of its business in the US, including for the American military.
During the years running up to the Russian invasion, in February 2022, BAE Systems shares struggled to gain traction amid ongoing fears about government spending on defence.
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What changed?
However, the invasion triggered a change of heart, as concerns mounted about global geopolitical security. In the UK, for instance, the new Labour government has committed to increase spending on defence to 2.5% of GDP.
Last month the group appeared for the first time on our list of the top 10 UK shares based on popularity with Elite Investors, roughly the top 3% of over 10,000 equity managers.
Top three Elite backers
Sources: Citywire / Morningstar, latest holdings data.
In total, BAE has nine Elite backers including Ben Preston who runs the Orbis Global Equity fund alongside Graeme Forster.
Preston told Citywire, ‘We first bought BAE Systems in our Global Equity strategy in early 2022, right after Russia’s invasion of Ukraine.
‘At that time, defence companies were unpopular from a responsible investing perspective, and weren’t showing much growth as the world had been generally peaceful.
‘The Ukraine invasion changed that. Defence was reappraised by investors as a critically important sector for national security, while increased government spending means faster revenue growth for the companies that supply the necessary equipment.’
The long haul
Preston doesn’t favour BAE Systems simply because of its role in defence, however; there are also specific elements about the business, and its shares, that he likes.
The group has been turned around ‘impressively’ under the leadership of chief executive Charles Woodburn, according to Preston, who added that he and his team rate the boss of the past seven years highly .
Despite the increase in the share price since he first bought it, Preston added that he and the team ‘continue to find it attractive for its steady growth and stable earnings whatever the economy may do’.
Shares in the group, which is valued at more than £39bn, trade at 17.5 times next year’s forecast earnings and carry a prospective dividend yield of 2.7%.
The company generated record revenues last year and, earlier this year, reported that its order book was at an all-time high. Analysts forecast that sales and profits will continue to grow at a similarly healthy clip for at least the next four years.
| Key facts – BAE Systems | |||
|---|---|---|---|
| Market capitalisation | £38.4bn | Price | 1,268p |
| Net debt | £2.26bn | Net debt/Ebitda | 0.7x |
| 52-week high/low | 1,415p / 902p | Return on capital employed | 12.7% |
| F’cst price to earnings | 17.5 | F’cst dividend yield | 2.7% |
| F’cst EPS growth | 10.4% | 12-mth share price | 39.0% |
Source: FactSet. EPS = earnings per share. Ebitda = earnings before interest, tax, depreciation and amortisation. Forecasts based on next 12 months.
