BAE Systems (LSE:BA.) shares have done very well for my portfolio since I first invested in 2022. I fact, I’ve added on dips twice since then, and both positions are also up.
The BAE share price has leapt 54% year to date and 240% over five years. Neither figure includes dividends. The outperformance over the FTSE 100 is massive.
Recently though, the defence stock has taken a breather. Now at 1,766p, it’s just under 11% lower than its June high of 1,982p.
Is this a dip-buying opportunity for my portfolio? Here are my thoughts.
Huge backlog
Until February 2022, BAE stock tended to amble along while pumping out regular dividends. However, when Putin’s tanks rolled into Ukraine, the geopolitical shock was seismic and the share price took off.
And when President Trump gave mixed signals on whether the US would defend Europe against Russian aggression, European leaders were jolted out of any lingering complacency. Defence spending was going to have to rise and the BAE share price got another lift.
The reason for the recent weakness appears related to the hoped-for peace settlement in Ukraine. If the war ends, investors may assume defence budgets will stabilise (or even shrink), reducing BAE’s order pipeline.
However, at the recent 2025 NATO Summit, members pledged to raise defence and security spending to 5% of GDP annually by 2035. And at least 3.5% of GDP is to be devoted specifically to NATO-defined defence expenditure.
Meanwhile, BAE’s backlog’s already huge (over £75bn in June), giving it multi-year visibility regardless of Ukraine headlines.
The breadth and depth of our geographic and product portfolio, together with our trusted track record of delivery, strengthen our confidence in the positive momentum of our business.
CEO Charles Woodburn, July 2025.
As I write, the war in Ukraine sadly continues, with neither side seemingly close to agreeing peace terms. President Zelenskyy has vowed to fight on while President Trump may yet walk away.
Valuation
Brokers expect steady if unspectacular growth over the next four years. This is obviously due to the nature of the industry, where multi-year contracts are signed with governments to produce submarines, jets, ships, missile systems, and so on.
| Year | Revenue | Earnings per share (EPS)* | Price-to-earnings (P/E) ratio |
|---|---|---|---|
| 2024 | £26.3bn | £0.64 | 27 |
| 2025 (forecast) | £28.1bn | £0.75 | 23.5 |
| 2026 (forecast) | £30.3bn | £0.84 | 21 |
| 2027 (forecast) | £32.4bn | £0.92 | 19.2 |
| 2028 (forecast) | £34.6bn | £1.05 | 16.8 |
The current (trailing) P/E ratio of 27 seems quite high, at least relative to historical standards for BAE. But as we can see, this potentially falls as low as 16.8 by 2028. And there’s a 2% dividend yield to add to the mix.
If Europe rapidly re-arms, these P/E multiple forecasts may prove conservative. However, the main risk I see here is that European nations — especially in the south of the continent, away from Ukraine’s frontline — don’t have the will or ability to actually stump up the cash.
Also, BAE is the Ministry of Defence’s largest supplier, but the UK government is hardly flush with cash right now.
All things considered though, the current geopolitical backdrop tends to favour elevated global defence spending long into the future. And BAE’s actively eyeing “significant opportunities across all our sectors“.
The dip isn’t yet large enough to warrant me scooping up even more shares. But I think BAE stock’s still worth considering for long-term investors wanting some portfolio exposure to rising defence spending.
