This stock can protect your portfolio against war with Iran

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.

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.

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.

Category: Economics