Will the BAE share price be among the top FTSE 100 winners in 2023?

The war in Ukraine is a terrible humanitarian disaster. But it reminded the investment world of the importance of the defense business. At BAE system (LSE: BA) share price has been rising since February 2022, and shows no signs of faltering.

Over the past 12 months, BAE shares have risen 43%, after years of going nowhere.

Up has dropped the forecast dividend yield to a modest 3%, mind. And there are some bigger ones FTSE 100 produce out there. But I can’t see BAE’s revaluation as too late, and I see signs of long-term earnings and dividend growth.

earnings growth

One of these signs comes from analysts’ forecasts. Over the next two years, they show rising earnings that will reduce BAE’s price-to-earnings (P/E) ratio from this year’s forecast of 17 to just 14.

At the same time, cash generation will help boost the dividend yield to around 3.6% in 2024. These forecasts are risky, as they are often wrong. But right now, I can’t help but think that we can face a healthy decade for defense procurement.

And looking at the historic P/E multiple of just around 11, I really think the upward movement in BAE’s share price is justified.

Looking forward

We should have full year results from BAE on 23 February. In the November update, the company reported £10bn in order intake in the second half of the year to date. Perhaps more importantly, BAE describes the order book as “particularly long cycles“.

At the time, 30% of BAE’s £1.5bn share buyback was completed, and is still in progress today. The board considers the balance sheet strong enough to support it. But this raises one of my concerns.

Debt

At the end of the first half, BAE reported £3.1bn in net debt, excluding lease debt. Is it wise to spend £1.5bn buying shares with so much debt on the books?

On balance, it can be a good choice, especially if the stock price is low. And if the debt is worth enough, it can be a profitable activity. But I’m always wary when I see companies prioritizing short-term shareholder returns from debt reduction.

I also wonder about the often fleeting stock market sentiment. What will happen when the war in Ukraine ends? After the daily reminders of gains for the defense industry have faded, can investors look for the next big sector swing?

Verdict

To return to the title question, I still think BAE Systems can end 2023 before the index. I doubt it will show the same performance as 2022, but I expect good results.

That said, it will not take much easing from the current bullish mood to weaken the year’s results. But then I think investing with a short-term horizon is a poor strategy.

I think investors who understand the business and risk can find a good long-term buy here. But when a major military conflict is in the news, we may experience volatility.