BAE Systems‘ (LSE: BT.A) shares have long been considered one of the most dependable investment plays on the entire FTSE 100. And once again, they’re showing us why.
I bought the defence stock a year ago, and sod’s law dictated that it instantly dipped. I wasn’t too worried though. After a strong multi-year rally, a bit of a breather seemed only natural. Now, the BAE Systems share price has duly taken off again.
Blue-chip star
Geopolitical uncertainty has turbocharged defence stocks across the board. With Donald Trump urging Europe to ramp up its own military spending, investors rushed into defence. It’s no surprise BAE led the charge.
Somebody who invested £10,000 in BAE Systems shares just three months ago has enjoyed a staggering 45% gain, so far. Their £10k would be worth £14,500 today.
Over the last year, the shares are up 27%, and over five years they’ve climbed 222%. All dividends are on top of that.
It’s not hard to see why. BAE’s delivering. Revenue rose 14% in 2024, driven by strong performance across all areas and bolstered by the $5.5bn Ball Aerospace acquisition, now operating as Space & Mission Systems. Underlying EBIT was also up 14%, and order backlog hit a record £77.8bn.
What an order book!
Orders just keep flowing. Just last year, BAE secured a £4.6bn contract to build Australia’s Hunter Class frigates and reached agreements under the AUKUS alliance to deliver nuclear submarines.
Its Hägglunds combat vehicle unit also pulled in around £2bn of fresh orders. And in space, the firm completed major deliveries for NASA and the US Space Force.
BAE raised £3.8bn in debt to fund the Ball Aerospace deal. It still felt able to spend £555m on share buybacks though.
That’s a lot of spending, but it shows confidence. Free cash flow still hit £2.5bn, and the total 2024 dividend was lifted by 10% to 33p.
Despite the performance, I have mixed feelings about buying more today. The shares trade on a price-to-earnings ratio of 25.5, well above the FTSE 100 average. That’s probably fair value for what is a premium stock, but still a little offputting.
Despite that 20% dividend hike, the yield’s only around 1.9%, so those investing at today’s levels are relying on further price appreciation. There’s always the chance that some kind of peace deal in Ukraine could give European governments an excuse to backtrack on their new defence spending commitments.
This stock could idle
The median 12-month share price forecast from 13 brokers sits at 1,724p today. That’s actually 1.3%, just below today’s BAE share price of 1,748p. That suggests analysts think the recent surge may have gone as far as it can for now. While forecasts cannot be relied upon, that echoes my feelings too.
Still, long term, I remain confident. BAE’s order backlog provides strong revenue visibility, and its investments in drone tech, advanced manufacturing and global partnerships are setting it up for the future. In today’s uncertain world, defence is a key sector.
I’m not convinced this is the perfect time to consider buying shares in BAE Systems. Yet for investors taking a long-term view, I’m not sure there’s ever a really bad time either.
