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Defence stocks like BAE Systems (LSE:BA.) often prove to be solid dividend shares to hold over time. Supported by the resilience of global weapons spending, dividends at this FTSE 100 contractor have risen every year since the early 2010s:
Last year, the dividend on BAE shares rose 10% year on year, to 33p per share. With European defence spending rising at its fastest rate for decades, further weighty hikes could be in the pipeline as well.
That said, the prospect of falling US arms budgets could pose an obstacle to more significant annual dividend growth. So what are City analysts predicting? And how robust are their current forecasts?
Solid forecasts
As you can see, City analysts are expecting dividends to continue rising at approximately the same rate as last year’s cash payout:
| Year | Dividend per share | Dividend growth | Dividend yield |
|---|---|---|---|
| 2025 | 35.9p | 9% | 2.1% |
| 2026 | 39.3p | 9% | 2.3% |
| 2027 | 43.2p | 10% | 2.6% |
This makes it one of the FTSE 100‘s hottest dividend growth shares in my book. To put payout increases on BAE Systems shares into context, short-term dividend growth across the broader index is pegged at 1.5% to 2%.
You will notice, however, that this defence share doesn’t offer the largest dividend yields out there. For the next three years, they lag the FTSE’s historical average (of 3% to 4%) by a large distance.
The lower yields on BAE shares reflect its substantial share price gains after Russia invaded Ukraine in early 2022. Before then, yields stood in or around the UK blue chip average:
On the plus side, though, the company appears in good shape to meet these projected dividends, and not just because of the profits stability that its non-cyclical operations provide.
For the next three years, annual dividends are covered more than twice over by anticipated earnings. Exact dividend cover of 2.1 times provides a wide margin of safety in case the bottom line underwhelms.
On top of this, BAE Systems also has a robust balance sheet it can use to support dividends. This is underlined by its decision to repurchase £1.5bn of its shares (due for completion next year).
Are BAE Systems shares a buy?
On balance, I think the FTSE company is a great share to consider for dividends. But this is not all, as I also believe it’s a great share to think about in a portfolio targeting robust capital gains.
BAE Systems’ share price has rocketed 202% in value since the start of 2022. I’m tipping it to continue soaring as arms spending ratchets up across the globe.
Latest data from the Stockholm International Peace Research Institute (SIPRI) showed worldwide military expenditure hit £2.72trn last year. This was up 9.4% year on year, and represented the steepest annual rise since 1988.
This increase was in large part due to surging European spending, SIPRI said. And it’s a trend I expect to continue as Europe’s armed forces rebuild after decades of underinvestment following the Cold War.
As I described earlier, falling US defence spending could be a possible obstacle for global operators like BAE Systems. Yet strength in Europe and the firm’s other markets (like Saudi Arabia, Australia, and India) may compensate for this.
On balance, I think BAE Systems is worth serious consideration right now.
