Cutbacks in defence spending by the US and UK, which hurt the sector so badly in recent years, look like being behind us which is good news for BAE Systems. While there are limited prospects for growth in the UK though, the earnings visibility here looks clearer as contracts seem to be long in length and fairly large.

The prospects for increased US spending have improved as a Congressional budget approval is expected to result in defence spending increasing above previous caps. The Middle East remains a bright spot, especially orders from Saudi Arabia, however there are some concerns that the fall in the price of oil could lead some countries to cut back on military spending.

Full year 2015 sales rose by 7.6% to £17bn which benefitted from increased Saudi orders, equipment sales on European Typhoon programme and increased activity across the naval business. However, underlying earnings did not keep up with sales, falling marginally to £1,683m due to the previously announced slowdown of the Typhoon production and impairments of their Australian shipyard. Foreign exchange translations were favourable.

At a current price to earnings multiple of roughly 13x, the shares favour well compared to the peer group and they pay an attractive dividend yield of around 4.0%. We would encourage investors to drip feed into the stock. This is a stock for long term investors looking for a mixture of capital growth and income and willing to accept a medium level of risk.