Could this FTSE 100 defence stock be perfect for growth and supercharging returns?

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FTSE 100 incumbent BAE Systems (LSE:BA.) has seen its shares surge recently. I believe it could be a great stock to buy for further growth and consistent returns. Here’s why.

Defence and aviation

As a quick reminder, BAE is a defence, aviation, and security business with operations in over 80 countries. Some of the products it manufactures and sells include fighter planes, radar, attack missiles, and warships.

So what’s the current state of play with BAE shares then? Well, as I write, they’re trading for 803p. At this time last year, the stock was trading for 551p, which equates to a 45% return over a 12-month period.

FTSE 100 stocks have risks

Despite my bullish attitude towards BAE, it is not without risks. Firstly, macroeconomic headwinds in recent months could cause issues. Soaring inflation, the rising cost of materials, and global supply chain issues could all impact performance and investor sentiment. For example, rising costs could put pressure on profit margins. Furthermore, supply chain issues could have an impact on fulfilling orders.

Next, although BAE shares have been on a great run recently, I can’t help but notice that they are trading at all-time highs. This means any negative news or issues could cause a sharp drop, which could affect returns and investor sentiment as well. This is something I intend to keep a close eye on.

Why I like BAE shares

So to the positives then. I am buoyed by BAE’s market position. It has an extensive portfolio, which has helped it to become one of the biggest players in its market. Furthermore, due to the current tragic events in Ukraine, defence spending has increased. I believe this is why BAE shares have soared recently. The future looks bright too, with BAE possessing an order book worth billions all the way until 2030. I think this is where the growth element comes in.

So let’s take a look at some fundamentals. Currently, BAE shares are on a price-to-earnings ratio of 18. This is higher than the FTSE 100 consensus ratio of 15, which many investors use to gauge value for money when buying shares. I don’t mind paying a bit more for quality, which is my current view on BAE shares.

Next, BAE has a good track record of performance, although I do understand that past performance is not a guarantee of the future. Looking back, I can see it has grown revenue and gross profit for the past four years in a row.

Finally, BAE shares would boost my passive income stream through dividend payments. The current dividend yield stands at 3.5%, which is in line with the FTSE 100 average of 3%-4%. I am aware that dividends are never guaranteed, however.

Overall, I believe BAE Systems shares could be set to grow further and could be an excellent option to boost my holdings. I would buy the shares for my portfolio, although part of me wishes I had purchased them a bit earlier.

The post Could this FTSE 100 defence stock be perfect for growth and supercharging returns? appeared first on The Motley Fool UK.

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Jabran Khan has no position in any of the shares mentioned. 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.