Why You Might Be Interested In BAE Systems plc (LON:BA.) For Its Upcoming Dividend

  • In Business
  • 2021-10-16 07:00:55Z
  • By Simply Wall St.

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see BAE Systems plc (LON:BA.) is about to trade ex-dividend in the next 4 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase BAE Systems' shares on or after the 21st of October, you won't be eligible to receive the dividend, when it is paid on the 30th of November.

The company's next dividend payment will be UK£0.099 per share, and in the last 12 months, the company paid a total of UK£0.24 per share. Based on the last year's worth of payments, BAE Systems stock has a trailing yield of around 4.0% on the current share price of £5.994. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether BAE Systems has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for BAE Systems

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. BAE Systems paid out a comfortable 44% of its profit last year. A useful secondary check can be to evaluate whether BAE Systems generated enough free cash flow to afford its dividend. It paid out more than half (59%) of its free cash flow in the past year, which is within an average range for most companies.

It's positive to see that BAE Systems's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. For this reason, we're glad to see BAE Systems's earnings per share have risen 14% per annum over the last five years. BAE Systems is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. This is a reasonable combination that could hint at some further dividend increases in the future.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, BAE Systems has increased its dividend at approximately 3.3% a year on average. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

The Bottom Line

Should investors buy BAE Systems for the upcoming dividend? Earnings per share have grown at a nice rate in recent times and over the last year, BAE Systems paid out less than half its earnings and a bit over half its free cash flow. It's a promising combination that should mark this company worthy of closer attention.

In light of that, while BAE Systems has an appealing dividend, it's worth knowing the risks involved with this stock. In terms of investment risks, we've identified 1 warning sign with BAE Systems and understanding them should be part of your investment process.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.


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