If I’d bought BAE Systems shares fives years ago, here’s what I’d have today

Unfortunately, I didn’t buy it BAE system (LSE: BA) shares five years ago. Since then, they have grown in five times the level of FTSE 100 totally.

BAE is an aerospace and defense contractor, and its weapons are in high demand these days, sadly. The stock rose 23.03% measured in one year, and 55.69% in five years. That compares to 9.57% growth in the FTSE 100.

I like this defensive investment

Over five years, BAE shares will turn your £1,000 investment into £1,557 from share price growth alone. Back-of-fag-packet calculations show dividends will add £200 or more.

For most of that time, stocks traded at around 10 or 11 times earnings, but that was before the war in Ukraine. BAE Systems is more expensive today, trading at 16.4 times earnings. It’s hardly exorbitant though, given the performance and prospects.

Last month’s results showed a record £37.1bn of orders in the full year 2022, lifting BAE’s backlog to £58.9bn. Sales increased 4.4% to £23.3bn, while earnings per share rose 9.5% to 55.5p.

It is rare to see healthy results in these uncertain times. Even the weak pound has risen, increasing the value of BAE’s overseas profits when converted back into sterling. If the rest of UK plc did the same, we would be in a much better place.

BAE Systems has made me money over the last five years (and the last six months, as it’s up 17.03% over that time). But what about winter?

There aren’t many FTSE 100 stocks doing better

A large backlog of orders gives me comfort. Defense contracts tend to be long-term relationships, so this ensures future profits. One potential (and desired) ‘risk’ is that we get some resolution to the Ukraine conflict and peace breaks out elsewhere. Frankly, I don’t see that happening. The US/China stand-off appears to be more than simple.

Another worry is that cash-strapped Western governments will be forced to cut defense spending, to the point of sales. Although in practice, defense increases the list of priorities.

BAE’s dividend is not the largest in the FTSE 100. At 3%, it is well below the average yield of around 4%. That is largely the result of strong stock price growth. Fortunately, the payout is guaranteed 2.1 times by earnings. Management just increased the dividend by 7.6%, and also made an £800m share buyback. With a higher-than-expected free cash flow of £2bn by 2022, the dividend looks solid, though certainly not guaranteed.

I’m struggling to find a reason not to buy this stock. Management predicts solid but unspectacular sales growth of between 3% and 5%. However, Citi considers this “conservative” and said investors should expect more.

My current investment strategy is to track FTSE 100 stocks with higher dividends and lower valuations, with a struggle BT Group high on my list. The troubled telecom giant yields 5.25% and trades at just 7.21 times earnings, so it more than meets my criteria.

However, when I look at the solid outlook for BAE Systems, I wonder if I should gamble on BT. I can buy BAE instead.