BAE Systems‘ (LSE: BA.) share price has been one of the standout performers on the FTSE 100 over the past couple of years. Shares in the defence giant have more than tripled since early 2022, recently hitting an all-time high near 2,000p. Even after a modest pullback, the stock’s still up roughly 60% year-to-date, trading around 1,870p.
For long-term investors like myself, it raises a pressing question: is there still value in the stock, or has the rally run its course?
How it got here
Several factors have driven this exceptional run, the most obvious being geopolitical. Rising global tensions have forced NATO members to ramp up defence spending, and the UK’s pledge of over £6bn for its submarine capacity gives a boost to BAE’s Barrow shipyard.
Meanwhile, the company continues to secure lucrative contracts. Just this month, BAE won a $40.8m deal with the US Navy to produce advanced countermeasure decoys — further strengthening its rapidly growing order book.
The company’s financials reflect strong operational efficiency. In its most recent results, revenue rose slightly to £26.3bn, missing expectations, yet earnings still beat expectations. Profit before tax rose to £2.33bn while earnings per share climbed to 69p – up roughly 10% on the prior year. That follows 14% growth in 2023, suggesting strong — albeit slowing — earnings growth.
The balance sheet also looks in decent shape, with manageable debt levels and solid free cash generation.
Still good value?
As is always the case with rapid growth, come questions about valuation. At present, BAE trades on a trailing price-to-earnings (P/E) ratio of about 29, well above its historical average near 12. Some of this premium is arguably justified given the structural shift in defence spending and the quality of its earnings. However, it also implies the market’s already pricing in a good chunk of future growth.
With the price rising, BAE’s dividend yield has steadily declined over the past five years. Now it’s as low as 1.7% — far below the FTSE 100 average of 3.5%. And yet, the actual dividend has been increasing consistently for over 20 years — evidence of just how rapidly the share price has risen.
Payments are very well covered with a payout ratio near 33%, so the company could afford to increase the annual dividend even quicker. On average, it’s been growing at around 5% a year. Currently paying 33p per share, forecasts expect it to reach 40p per share by the end of 2026.
Looking ahead
Price-wise, analysts appear cautiously optimistic. The average 12-month price target stands at roughly 2,008p, suggesting only a modest 7% growth from today’s levels. Barron’s recently described BAE as a strong value pick, projecting earnings growth of around 10% alongside potential share price gains of 8%.
But there are some suggestions of over-excitement across the European defence sector. Data suggests valuations have climbed to roughly 20 times earnings compared with a long-run average of 12 times, which puts the sector at risk of a downturn if investor sentiment shifts.
I will continue to hold my BAE Systems shares as a core part of my portfolio, but I suspect the days of easy gains may be behind us. With a high valuation and low yield, the current price doesn’t make it feel like a must-have – but I still think it’s a good defensive pick.
