Here’s why I think defence titan BAE Systems (LSE:BA) could be a great dividend stock to add to my portfolio in 2022.
An impressive history and a bright future
BAE Systems is a global leader in the aerospace, defence and security sectors. The business has a stable annual dividend distribution history that spans several decades, rewarding investors with regular income even during the worst stock market drawdowns of the 21st Century. Shareholders currently pocket a respectable dividend yield of around 4%.
Looking forwards, the recent AUKUS trilateral security pact between the American, British and Australian governments bodes well for BAE Systems longer term. Australia is the company’s fourth largest sales market and significant future growth is anticipated in the firm’s operations Down Under.
Not without risks
BAE Systems’ principal markets are the US, UK and Saudi Arabia respectively, with 77% of its sales going to these three destinations alone according to the latest annual report. For some investors, revenue concentration in a small number of geographic areas could be a cause for concern.
Historically, demand for the company’s offerings from these countries has proved robust over the years with few signs of abating. However, as the seventh largest defence contractor globally, BAE Systems faces stiff competition for market share from well-established corporations stateside, such as Lockheed Martin and Boeing. To mitigate this, BAE Systems needs to maintain its investment in R&D and improve efficiencies in a sector where competitive advantage is crucial.
The company will publish its full financial results for 2021 on 24 February. It will be critical for the defence giant to meet expectations of earnings per share growth of 3-5% compared to 2020 – a forecast that BAE Systems reasserted in guidance issued late last year.
Is it too late to buy?
BAE Systems has enjoyed a strong start to 2022. The share price has climbed nearly 9% this year to date, reaching 604p per share and trading at a current P/E ratio of 10.94. So, are shares in the UK’s largest defence business still a good bargain today?
To answer this, it is important to note the imminent security threats posed by Russian troops mobilising on the Ukrainian border and geopolitical uncertainty building in the West’s relationship with China.
These tensions could drive US and UK defence spending higher in the near term, thereby benefiting BAE Systems since 95% of its sales are related to military expenditure. Accordingly, I expect the stock’s impressive recent performance to continue in the coming months. Many analysts share my optimism, predicting further upside ahead.
Overall, BAE Systems offers investors a healthy dividend and has a solid history of performing well when the broader market is turbulent. I consider this stock a great buy for my ISA at its current price.
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Charles Carman owns shares in BAE Systems and Boeing. The Motley Fool UK has recommended Lockheed Martin. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
