How I think clearing its pension deficit is another strong sign for the BAE share price

How I think clearing its pension deficit is another strong sign for the BAE share price

first_img I’m sure you’ll agree that’s quite the statement from Motley Fool Co-Founder Tom Gardner.But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.What’s more, we firmly believe there’s still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.And right now, we’re giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool. Image source: Getty Images. “This Stock Could Be Like Buying Amazon in 1997” As investors, it is only natural that the more exciting, headline-grabbing news stories are the ones that get our attention. Stories of political strife or a new technology get the imagination fired up, but as Warren Buffett would tell you, many times it is the underlying, perhaps boring, fundamentals that can make or break an investment.I for one, then, was excited last week when BAE Systems (LSE: BA) said it looks like it will be able to clear its pension deficit five years early, with a £1bn injection in the coming months and a further £490m this year set to more than halve the number.5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…And if you click here we’ll show you something that could be key to unlocking 5G’s full potential…Strong foundationsAs I said, some company news tends to grab headlines and some doesn’t, but for me when a company can afford to invest in this kind of non-headline-grabbing, fundamental aspect of its business, it is a far greater indication of its strength.BAE will be borrowing the money to help pay off its pension deficit. Its forecasts for free cash flow suggest it will rise to £1bn this year, compared to £850m in 2019. BAE’s pension, which services around 180,000 members, is one of the largest in the FTSE 100, and has long overshadowed the company’s investment potential.Though borrowing to pay off the pension will raise the company’s net debt levels to £1.8bn, by paying the deficit off early it will also end the need for top-up payments early as well – the last payment is now expected in 2021.The one word of caution I would have is that unlike other companies such as BT, which also held a massive pension deficit, BAE hasn’t closed off its scheme to new employees. This of course leaves the pension deficit open to expanding again, though I am of the opinion that BAE will have the cash to cover it.Income generatorFor me, I have always seen BAE as a solid, safe investment that produces a nice income. In fact I agree with my Foolish colleague Alan Oscroft, that BAE is probably one of the most dependable income generators.Due to the recent gains the shares have been making, its yield now stands at about 3.5% – not the largest number by any means but certainly towards the bottom end of what I look for, personally. Indeed I would see an intermediate price-dip as a perfect opportunity to invest in BAE to take advantage of the higher yield.Annual growth of the dividend has also been pretty solid. Though over the last five years the annual growth rate averages just 2.2% – again solid but not exactly revolutionary – this figure actually hides the more recent growth levels.The annual dividend was recently increased by 4.5%, and if BAE’s strength and free cash flow continue the way they have, I see no reason not to expect similar dividend growth in the next year or two. Paying down its pension deficit will only help with this goal, and makes BAE a share well worth considering. Karl has shares in BAE Systems. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors. Our 6 ‘Best Buys Now’ Shares Simply click below to discover how you can take advantage of this. How I think clearing its pension deficit is another strong sign for the BAE share pricecenter_img I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement. Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we’re offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our ‘no quibbles’ 30-day subscription fee refund guarantee. Enter Your Email Address Karl Loomes | Tuesday, 25th February, 2020 | More on: BA Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge! See all posts by Karl Loomeslast_img

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