BAe Systems - dividend and share price

[Wizard]

In the Market Update provided on 3rd April this year (https://www.investegate.co.uk/bae-syste ... 00066636I/) BAe Systems Plc (BA.) said the following about their dividend:

Against a background of significant government and social challenges, and the uncertainty as to the duration of the resulting disruption, the Board believes it is in the Company`s best interests, having regard to all our stakeholders' interests, to defer the decision on the 13.8 pence per share dividend proposed by the Board when announcing the Company's 2019 results in February.

We recognise the importance of the dividend to our shareholders and whilst it remains our intention to pay a dividend, the timing of any payment will be contingent on prevailing macro-economic and social conditions over the coming months. An update on the dividend payment will be provided at the Half Year results on 30 July 2020, at which time the Board will also review remuneration of the Executive Directors.

The 30th July is fast approaching and I wondered if any LemonFools have a view on the prospects for the dividend? Taking the wording at face value they say the timing is contingent on economic conditions rather than the amount, but I am not so naieve to think the amount could not be reduced as well. The share price has stubbornly refused to recover since the Covid19 driven declines in February / March. This contrasts with their US listed competitor Lockheed Martin which is up 40% since the recent closing low on 23rd March - in part helped by some positive results released earlier this month. Amongst UK listed comparisons it has picked up quite a bit more than Babcock and Rolls Royce, but lagged Meggitt a little.

I wondered what other Lemon Fools views were on the prospects for the BA. dividend. Will they pay? WIll they pay in full? Will they pay soon? If they do announce a payment in full in the near future is this likely to provide some support to a recovery in the shareprice or is the gloom in the sector likely to out weigh that?

I have not been a huge fan of BA. in recent years and do not currently hold, but I am considering buying in ahead of the announcement in part having seen the recent good results from Lockheed Martin.

[tjh290633]

You may have noticed that IMI today reinstated their deferred Final Dividend for 2019, but also halved the Interim for 2020.

My suspicion is that reinstatement of some of those deferred dividends will become a regular occurrence during this coming reporting season.

TJH

[Wizard]

You may have noticed that IMI today reinstated their deferred Final Dividend for 2019, but also halved the Interim for 2020.

My suspicion is that reinstatement of some of those deferred dividends will become a regular occurrence during this coming reporting season.

TJH

You may well be right. Do you think BA. will do so? And do you think they will follow IMI by reducing the dividend going forward?

[monabri]

Here's the IMI trading update for the last 6 months. Where's the justification for such a cut in the dividend? The business is reducing the paid dividend by £57m approx. They're reporting increases ( revenue, profit, EPS) compared to H1 2019 and yet the divi is halved? Seems the business has done well over the covid 19 period.

The text says

"We will also reset our dividend for 2020 to a level that enables IMI to more effectively deliver on its long-term growth ambitions. Finally, IMI is reinitiating guidance with this announcement, albeit on a qualified basis given the continued uncertainty regarding any future impacts from the Coronavirus."

Long term growth ambitions?

[dealtn]

I wondered what other Lemon Fools views were on the prospects for the BA. dividend. Will they pay? WIll they pay in full? Will they pay soon? If they do announce a payment in full in the near future is this likely to provide some support to a recovery in the shareprice or is the gloom in the sector likely to out weigh that?

Well I don't believe there is a direct relationship between dividends and share price, rather that it is the cash flows of the business, and the expected future cash flows that determine value, not the dividend decision by the Board of Directors.

At best I think the relationship is a second order one where the change in dividend policy reflects the marginal change in Board expectations for the business generally, or as in the case for Banks recently a Governments ability to halt the dividend reflects the general sense that Banks are now more susceptible to Government interference in how decisions about lending etc. are made (and hence negative for the share price).

At the margin you will get some forced buying/selling as companies move from "zero" payers to "something" payers (and vice versa) as Income funds are dictated to make allocation decisions, but even this I don't see as a strong factor for well capitalised and liquid shares.

It's a share I own, but its attractions to me are the return on capital (or equity) and a general feeling that the world post Covid is less certain and safe from a security perspective, and I think as a result the relative spend by large countries on defence etc. is likely to grow compared to other expenditures, from which the company will benefit.

[dealtn]

Here's the IMI trading update for the last 6 months. Where's the justification for such a cut in the dividend? The business is reducing the paid dividend by £57m approx. They're reporting increases ( revenue, profit, EPS) compared to H1 2019 and yet the divi is halved? Seems the business has done well over the covid 19 period.

Instead of looking at the last 6 months maybe look at the last 5 years and ask "Where's the justification for having a dividend cover of between 1 and 1.5?" On the basis that such a cover ratio is so low (and debt has doubled on that 5 year time frame too) I'm not at all surprised that a change in Dividend Policy has been taken with cover more than doubling.

[monabri]

Here's the IMI trading update for the last 6 months. Where's the justification for such a cut in the dividend? The business is reducing the paid dividend by £57m approx. They're reporting increases ( revenue, profit, EPS) compared to H1 2019 and yet the divi is halved? Seems the business has done well over the covid 19 period.

Instead of looking at the last 6 months maybe look at the last 5 years and ask "Where's the justification for having a dividend cover of between 1 and 1.5?" On the basis that such a cover ratio is so low (and debt has doubled on that 5 year time frame too) I'm not at all surprised that a change in Dividend Policy has been taken with cover more than doubling.

Fair point. IMI is not one that I hold and so I haven't looked into the history. The comment was simply comparing H1 figures and questioning "why now".

As Wizard pondered "many months ago", is this the time for many more resets?


As for BAE Systems, I believe that they are a well managed company and that the dividends could possibly be reinstated in full. Their project time frames run over many years and a delay of a few months might be caught up. The management will be looking at how they can bring the milestone payments back in line.

[tjh290633]

You may have noticed that IMI today reinstated their deferred Final Dividend for 2019, but also halved the Interim for 2020.

My suspicion is that reinstatement of some of those deferred dividends will become a regular occurrence during this coming reporting season.

TJH

You may well be right. Do you think BA. will do so? And do you think they will follow IMI by reducing the dividend going forward?

I have no idea, but BA. report next Thursday, so we shall know then.

TJH