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Finding good stocks to buy during periods of economic volatility, like now, is no easy feat. One option that I want to take a closer look at is BAE Systems (LSE: BA.).
Defence and aviation
As an introduction, BAE Systems is one of the biggest defence, weapons, and aviation businesses in the world. Operating across 80 countries, it employs over 90,000 people.
So what’s the current state of play with BAE shares? Well, as I write, they’re trading for 896p. At this time last year, they were trading for 812p, which equates to a 10% increase over a 12-month period.
Many other blue chips and FTSE 100 incumbents have seen their shares struggle due to macroeconomic and geopolitical factors. BAE has bucked this trend.
The bull case
To start with, I believe BAE is well-positioned through its profile, presence, experience, and expertise, to continue performing well and providing consistent returns. This is because defence spending is at an all-time high. In fact, recent data showed it has surpassed $2.24trn globally.
BAE has long and lucrative contracts with many of the world’s top defence spending countries and can benefit from current spending patterns. Furthermore, the recent tragic events in Ukraine have only heightened the need for defence spending.
Next, I could be easily led to believe that the current issues in Ukraine are pushing up BAE shares and if tensions ease, the shares could come down. To counter that notion, I can see BAE has an extensive order book with future commitments from many of its top clients. The order book totals a mammoth £100bn between current and backlogged orders. This should keep the money flowing in, and ensure consistent returns for investors.
Moving onto returns, BAE has an excellent record of paying dividends. At present, the dividend yield stands at 3%. This is in line with the FTSE 100 average of 3%-4%. In fact, the firm has already committed to increasing its dividend amount for the next two fiscal years, which shows confidence in its business model and future growth prospects.
One of the best stocks to buy
From a bearish perspective, the obvious risk linked to BAE shares is that of easing geopolitical tensions. While this would be welcome for obvious reasons, it could reduce demand for its products and impact performance and investor returns. For me, the backlogged order book offsets this risk.
Another risk to be wary of for BAE is that of dividend fluctuation. Not all contracts start and end at the same time. If contract timings were to coincide with annual earnings (which underpin dividend decisions) payouts could be affected negatively. On the other side of the coin, dividends could also be increased if a big contract lands close to annual earnings.
Overall, I like the look of BAE Systems. I consider it one of the best stocks to buy in the current climate and one to hold onto for a long time as part of my holdings. I’d like to buy shares when I have the spare cash to do so.
