This stock can protect your portfolio against war with Iran

By Associate Editor David Stevenson Feb 17, 2012

David Stevenson

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The Iranian nuclear story continues to gather pace.

On Wednesday, Tehran announced that for the first time it had loaded some of its own home-made nuclear fuel rods into a test reactor.

This could be just jingoistic spin by the Iranian president ahead of next month’s ‘elections’. But it’s certainly raising tension levels. And it might prove much more serious – the planet could soon be pushed into yet another conflict.

Here’s hoping it doesn’t happen. But meanwhile, there’s one stock you can buy now to prepare your portfolio for the worst.

A war with Iran is a distinct possibility

The Iranian nuclear tale has been dragging on for ages. Iran says it only wants to use nuclear power for energy supply purposes. But when you’re sitting on as much oil as Iran is, that doesn’t quite ring true.

The country is the world’s fifth-largest producer, with 5% of the world’s crude output. What’s more, it has estimated reserves of 151 billion barrels, the third largest of all.

So no one’s really buying that claim. The big concern of course is that if Iran gets its own nuclear weapons, it might use them to attack Israel.

Yes, actually using such weapons would be a disaster for all concerned. But no one is quite sure what Iran’s leadership is capable of – with the regime in danger of collapse, it might do something drastic.

That’s why the US and Europe have announced a wide range of energy and financial sanctions. Yet these aren’t being universally upheld. China, for example, keeps buying large amounts of oil from Iran and investing in its energy industry.

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My colleague Matthew Partridge wrote about the issues surrounding the Iranian nuclear project recently: The best way to hedge against war with Iran, so I won’t say much more about them here. But the possibility of a pre-emptive strike by the Israelis, backed by the US, certainly cannot be dismissed.

That’s not something anyone really wants to see. But that won’t necessarily stop it from happening. American economist and outspoken professional investor Doug Casey sums up the situation really well – if a tad controversially.

“Western powers have been provoking Iran for years”, he says. “I saw another report proclaiming Iran is likely to attack the US, which is about as absurd as the allegations Bush made about Iraq bombing the US.”

“We’re dealing with criminal personalities on both sides, and criminals are very stupid, meaning they have an unwitting tendency to self-destruction. I think the odds favour actual fighting in the not-too-distant future.”

The stock to buy to protect your wealth

So how can you protect your portfolio from all this? As Matthew noted, a war in the region might persuade Iran to shut down the Strait of Hormuz, something it’s threatened several times before. As 40% of the oil barrels shipped around the world has to travel through the Strait, crude prices could be sent skyward.

Yet oil prices are already high. And at current levels, it would make sense for other oil producers to ramp up their production, which would stop crude costs climbing too far.

Gold, of course, as the ultimate safe haven, is just about a nailed-on certainty to benefit from an outbreak of hostilities.

But what about stocks? One classic candidate reported its final results yesterday.

BAE Systems (LSE: BA/) is the world’s second-largest defence firm, based on its 2010 revenues. BAE is also a major supplier to the Pentagon, which provides almost 50% of total sales. As far as its contribution to our export performance is concerned, this is a British success story.

The recent picture hasn’t looked too good, though. Total sales in 2011 fell 14% to £19bn as US combat vehicle sales dropped by 30%. Meanwhile operating profits also dipped slightly, to £1.6bn, although underlying earnings per share rose by 15% due to tax reasons.

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The immediate outlook for BAE isn’t looking much brighter. Military budgets in both the UK and US are set to remain under the cosh as government spending cuts take hold.

But we’re talking about a truly global business here. BAE is a leading player in Saudi Arabia and Australia. India, where defence spending is expected to grow “substantially” says the firm, has now become a key business area.

The order book is currently £36bn, ie almost two years’ sales. If a Middle East conflict does erupt, the US will be bound to raise its military equipment spending once more. Which must benefit BAE.

Clearly, buying shares in a defence contractor isn’t everyone’s cup of tea. We leave that decision to you. But shares in BAE have been sold off on fears over defence cuts on both sides of the Atlantic. The stock now sells on a forecast price/earnings ratio for 2012 of just eight.

Further, the dividend has just been raised by 7.4%. That means the prospective yield is an inflation-busting 6%. BAE won’t stay this cheap if a war with Iran does break out. And even if – fingers crossed – we manage to avoid it, the stock still looks decent value.

• David writes for The Fleet Street Letter, Britain’s longest-running investment newsletter. Read more about The Fleet Street Letter and David's research here.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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Comments (10)

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  • 1. Allan Clarke

    (17 February 2012, 12:46PM)  Complain about this comment

    This seems to be a bit of a one sided article in favour of the America's and the west in general.
    Whether Iran wants to a nuclear bomb for energy or defensive purposes has really got nothing to do with them. Personally I wish IRAN well in acquiring a nuclear bomb for strictly defensive purposes. After the fate of both Iran and Afghanistan by America and NATO, Iran would be well advised to obtain one.
    This is about america maintaining petrodollar warfare as it has been since they came of the gold standard and now america is desperate since iran has been bypassing trade using US dollars along with other countries and growing. Will america succeed, let's hope they dont!

  • 2. Stephen Griffiths

    (17 February 2012, 01:54PM)  Complain about this comment

    Dreadful cynical article. The thrust of Doug Casey's interview was that war would be an unmitigated disaster for all sides. So to quote him as saying it was unavoidable is to use his words against his purpose. He also said the push for war was based on an old misguided belief that war was 'good' for the economy. And here you are the next day quoting him, saying that BAE systems, a British 'success' story should do well if we decide to assist the Americans in attacking another country. Anyone remember Iraq's 'weapons of mass destruction'?

  • 3. Nick Broonage

    (17 February 2012, 02:21PM)  Complain about this comment

    As the commenter above said, this is not about preventing Iran from acquiring nuclear defensives because it would pose a threat to wider world.
    This is about the USA protecting its interests economically. The movement away from trading in US Dollar$ has got them mad as hatters.
    India and other nations such as Russia were bypassing US dollar denominated trades for other currencies such as their own and even Gold!
    If this starts to take off the dollar would undergo a massive devaluation as oil and other US dollar denominated commodities would no longer require US dollars.
    The recent India bombing bears all the hallmarks of a US/Israeli false-flag, let's just hope the Indians don't fall for it.
    Britain and the rest of the western world aiding the USA have got nothing better to do because their economies are on the brink of collapse, so why not rape and plunder another nations resources ala Iraq.

  • 4. paul

    (17 February 2012, 03:59PM)  Complain about this comment

    If only we were plundering Iraq. Some supertankers of free oil shipped back here would come in handy.

  • 5. Joel Murray

    (17 February 2012, 05:10PM)  Complain about this comment

    @paul

    This attitude you just displayed is typical of the west. In the west have the lower classes who just want to live off of benefits because they are lazy and believe it's their divine right whereas the rich from politicians to bankers and corporations are happy to earn their living by stealing it in a variety of intricate and nefarious means.

    What is it about this characteristic of the west in general. They'd rather take the easy route by being lazy or using brute force to earn their living.
    A recent article concerning the Euro and possible China bailouts, a spokesman from the chinese said something along the line of ...why should they bailout Europeans just so they can put their feet up and take it easy.

    This free-ride can not last much longer as we're already seeing and indeed western leaders who, in reality, despise their own people will take the harshness to them when they can no longer muscle their way around the rest of the world. Wake up!

  • 6. Dilip

    (17 February 2012, 09:39PM)  Complain about this comment

    Some excellent comments made above, what this editor is saying is the West is always good and the East is always bad, and we must assist the West in maintaining its hegemony by buying defense stocks, which would also "protect our money".
    Talk about biased.

  • 7. W Melling

    (18 February 2012, 07:50PM)  Complain about this comment

    Dilip what more do you expect from the author. He lives in the west and is obviously one of those who will say and do whatever it takes to support his government and its allies. Even if that means investing in a very unsavoury company such as BAE.
    Money will always triumph over moral-hazard to people like him even if it means supporting a government that is blatantly criminal.
    We live in interesting times.

  • 8. NeutronWarp9

    (19 February 2012, 03:47PM)  Complain about this comment

    After reading some of these comments, I am grateful for not living in a true democracy. The USA perceives 'Militant Islam' as a threat and will act accordingly. On balance, despite legitimate crtiticisms of 'The West', I side with America. Might is Right afterall. If you don't like it - as in the playground - go away and hide in a corner.
    Iran has a great history but its air and sea forces are relatively feeble. The Strait of Hormuz would soon be re-opened and Iran's coastal weaponry obliterated. The resulting power vacuum is the real worry. Islam will fill the political void in many Middle Eastern countries, and although government based upon a tolerant interpretation of the Koran threatens nobody, regimes based upon genocide, intolerance, misogyny and regression do. I would lose no sleep if such regimes with a nuclear threat were bombed back to the Stone Age. I concur with DS: Buy Buy BAE. Bye Bye Ahmadinejad.

  • 9. Stephen Griffiths

    (19 February 2012, 10:45PM)  Complain about this comment

    I don't even know where to begin with the last comment. Firstly in the real world we don't bomb regimes...we bomb people. Mums, Dads, Grandparents, siblings, kids, babies. Nice as the idea is that we target regimes, even the most conservative estimates for the civilian body count in Iraq, are well above 100,000...people. Like you and me. Secondly you are unhappy about them being mysogynistic or intolerant presumably because you are such a modern liberal forward thinking person...yet you are happy to send them back to the stone age. "You're not tolerant enough so I'm going to kill you"...is that how it works?

    Finally, as you mention it's just plain stupid because it creates more enemies than there were previously. BTW your playground reference is interesting because I remember most bullies being deeply insecure unhappy people that were pretty much hated by everyone. I'd rather be the smart popular kid that other kids want to know.

  • 10. Ukrainian

    (20 February 2012, 09:32AM)  Complain about this comment

    Just to support the guys above. Even when I am 100% sure that BAE will skyrocket, I will not buy the shares of this company. There is a good thing in some Arabic countries - a Muslim index that does not include a range of sectors that go against sharia.

    The first level of DJIM screening removes companies involved in such products alcohol, pork-related products, conventional financial services (e.g. banks and insurance companies), entertainment (e.g. hotels, casinos, gambling etc.), tobacco, and weapons and defense.

    I believe, something like this must be introduced in the West.

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