It’s been a great year for investors in defence giant BAE Systems (LSE: BA.). The share price has surged 68% year to date and now sits at a record high of 1,925p!
For context, the FTSE 100 has risen 7.6% in 2025, which is still a strong showing given all the global trade uncertainty.
$150bn arms fund
A few things appear to have pushed the defence stock to a record level in the past couple of days. First, Russia launched the biggest aerial bombardment of the war so far on Ukraine over the weekend. President Trump responded by saying that Russia’s Vladimir Putin had “gone absolutely crazy“.
Unfortunately, this highlights how dangerous the geopolitical situation is and will no doubt reaffirm the need for enhanced defence capabilities across Europe.
Related to this, the European Union (EU) just gave the nod for a €150bn arms fund. This Security Action for Europe (SAFE) scheme will give loans to European nations to fund joint defence projects.
Earlier this month, the UK signed an agreement with the EU that brings firms like BAE a step closer to participation in SAFE projects. If the firm does take part, this should open up growth opportunities across its portfolio, as Europe has underspent on defence for decades.
Finally, it was a positive day for the whole stock market Tuesday (27 May), after Trump extended the deadline to impose 50% tariffs on European imports.
All UK aerospace and defence stocks have been boosted this week. Rolls-Royce has jumped above 865p, while Babcock International is also at a 52-week high.
Not a cheap stock
One issue to note here is BAE’s valuation. After surging 68% year to date, the price-to-earnings (P/E) ratio has crept up to 30. That’s quite high for this stock, while the dividend yield is now only 1.7%.
Based on earnings forecasts for 2025, the forward-looking P/E multiple drops to about 25.5. That’s better, but still far from cheap. If the hoped-for ceasefire happens in Ukraine and US-EU trade negotiations stall, the share price could pull back sharply.
Another risk is that BAE might not be fully integrated into the SAFE projects. Further negotiations are still required before British defence contractors can compete for joint procurements, according to the EU.
Still bullish
It’s hard to overstate how much Russia’s invasion of a sovereign European country has fundamentally changed the geopolitical landscape. It has reignited Cold War-era tensions and forced a global reassessment of security.
Then there’s the ongoing tussle between the US and China to be the dominant global superpower. And the China-Taiwan, India-Pakistan, Iran-Israel stand-offs.
Given all this, I doubt global defence spending’s going to drop sharply over the coming decade. Consequently, I think BAE’s sales, profits, dividends and share price all head higher over the long term. I’ll be hanging on to my shares.
If I didn’t already own the stock, I don’t think I’d pile in at today’s price. My preference would be to wait and buy on double-digit dips, which do occur every now and again with BAE shares. The last one happened between March and early April.
Alternatively, investors could take a look at the HANetf Future of Defence ETF, which gives exposure to a range of defence companies.
