1 FTSE 100 giant to consider for a Stocks and Shares ISA

Our writer thinks it’s worth considering the UK’s largest defence contractor as a possible candidate for inclusion in a Stocks and Shares ISA.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

ISA Individual Savings Account

Image source: Getty Images

A report on Sky News this week got me thinking about whether a particular FTSE 100 stock would be worthy of consideration for a Stocks and Shares ISA. One of the channel’s reporters went inside a Ukrainian drone factory. At the start of the country’s war with Russia, it was producing 100 a month. Astonishingly, this has now increased to 100,000. And it’s not enough.

A changing landscape

One of the people working at the factory claimed that drones will soon replace humans on the battlefield. If this were to happen, I think the potential for the industry’s huge. In 2023-2024, the UK government spent £14.5bn — 27% of the country’s defence budget — on people. If some of this was diverted to equipment (including drones) then BAE Systems (LSE:BA.) could be a big winner. It’s already the largest supplier to the Ministry of Defence. More importantly, fewer lives might be lost.

The drones being made in Ukraine were relatively small. They looked a bit like the ones you could buy in a specialist shop or online. However, Russia recently released a video showing its own version of the technology. These were much bigger and looked like smaller versions of America’s B-2 bomber.

As BAE Systems explained in its 2024 annual report, large defence systems can quickly be overwhelmed by what is known in the industry as uncrewed air system (UAS) attacks. That’s why it’s modified its TRIDON anti-aircraft defence system to cope with the increased threat. But the group also manufactures drones. In 2024, the company completed a number of acquisitions which strengthened its UAS and counter-UAS capabilities.

However, BAE Systems is about more than drones. It also manufactures and sells fighter jets, land combat vehicles and submarines. As of 30 June, it had an order backlog of £75.4bn, equivalent to roughly three times its annual sales.

What do brokers think?

Analysts are expecting the group to report earnings per share (EPS) of 75p in 2025. This means the stock trades on 23.3 times forward earnings. Although not cheap, the ‘experts’ appear to think that the group’s shares offer good value at the moment. The consensus is that they’re currently (29 August) 19% undervalued. The most optimistic reckons they’re worth 43% more.

By 2027 — if the forecasts are accurate — EPS will have increased by 36.5% compared to 2024.

However, income investors are likely to be disappointed with the stock’s present dividend yield of 1.9% — the average for the FTSE 100 is 3.4%. But this is likely to be overlooked if its recent share price rally continues. The group’s now the UK’s 11th most valuable listed company.

Making money out of global conflicts is controversial. But a recent YouGov survey found that 60% of those with a view wanted defence spending to be increased. It appears as though the majority believe it’s the primary duty of government to protect its people.

I think it’s clear that the group’s operating in a sector that’s growing and, whether we like it or not, is likely to continue doing so. NATO members have pledged to increase core defence spending to 3.5% of Gross Domestic Product by 2035.

Acknowledging that not everyone would be comfortable investing in the sector, I believe BAE Systems is a stock to consider.

James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended BAE Systems and YouGov Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Artillery rocket system aimed to the sky and soldiers at sunset.
Investing Articles

£7,500 invested in BAE Systems shares 10 days ago is now worth…

Why have BAE Systems shares experienced a sudden double-digit pullback? And does this present a buying opportunity for my portfolio?

Read more »

Picture of an easyJet plane taking off.
Investing Articles

£10,000 invested in easyJet shares 4 weeks ago is now worth…

It's been a crazy month for easyJet shares. Here's what would have happened to an investor's £10,000 stake put to…

Read more »

CEO Mark Zuckerberg at F8 2019 event
Investing Articles

Down 31%, is this a rare chance to buy Meta stock for my ISA cheaply?

After rising to near $800 in 2025, Meta stock has pulled back to around $550. Edward Sheldon looks at whether…

Read more »

Santa Clara offices of NVIDIA
Investing Articles

18% off its peak, is Nvidia stock now attractively priced?

Nvidia stock has given up almost a fifth of the price it commanded at its peak over the past year.…

Read more »

Aston Martin DBX - rear pic of trunk
Investing Articles

The Aston Martin share price destruction helps illustrate 5 common investing mistakes!

The Aston Martin share price has been a disaster for investors. Christopher Ruane highlights a handful of lessons we can…

Read more »

DIVIDEND YIELD text written on a notebook with chart
Dividend Shares

How this stock market correction can help boost a second income by 25%

Jon Smith explains how rising dividend yields across some existing income shares can be seen as an opportunity to grow…

Read more »

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

Considering a SIPP? Today’s market could provide an excellent opportunity to start

Mark Hartley breaks down the benefits of using a SIPP for retirement, and how current market conditions could offer a…

Read more »

Calendar showing the date of 5th April on desk in a house
Investing Articles

Looking for last-minute ISA ideas? Check out these UK stocks before April 3

Easter bank holidays mean the deadline to put cash into a Stocks and Shares ISA might be closer than UK…

Read more »