After the Cold War ended in the early 1990s, governments across the West cut defence budgets heavily and invested money elsewhere. This peace dividend, as it was called, didn’t stop BAE Systems (LSE:BA.) pumping out its own dividends. But it didn’t help the share price, which ambled between 1998 and early 2022.
President Vladimir Putin shattered this when Russia launched its invasion of Ukraine. Since February 2022, the BAE share price is up 255%, before dividends. Of this, 76% has come in 2025 alone.
The question now is whether BAE stock keep its impressive run going over the next 12 months. Let’s consult the experts to try and get a better idea.
The latest forecasts
Perhaps understandably given the dangerous geopolitical times we’re living through, most analysts remain bullish on the stock. Currently, 14 out of 21 rate it as the equivalent of a Buy. Only four have it down as a Sell.
However, the average 12-month share price target among these experts is 2,124p. That’s only about 4.2% above the present level of 2,038p.
In other words, if they’re collectively correct, investors could be looking at a return of £5,210 next year from a £5,000 investment. Not exactly impressive.
But BAE also has a decades-long history of raising its annual dividend. What if we include that? Well, unfortunately, the forecast dividend yield is only 1.9%. That level of income (£95) from five grand is more like petrol money than holiday spends.
Big recruitment drive
Of course, these analysts could be wrong. Today (30 September), we learned that Putin has ordered the conscription of some 135,000 new troops. This would be Russia’s largest military call-up since 2016.
So the tragic Ukraine conflict looks set to drag on. Or even spread further afield (let’s hope not).
All this is sure to be alarming European leaders, as well as Washington. And while Europe is a maze of regulations and bureaucracy, I think it will move quickly to bolster its defences. Money will be found, in my view, especially as Russian drones are violating European airspace, according to reports.
Therefore, it’s likely that BAE’s already massive £75.4bn contract order backlog is going to grow larger in future. Given this backdrop, it’s quite possible that the share price keeps outperforming.
Potential valuation risk
The main risk I see here now is valuation. The defence stock is trading at 31.2 times earnings, which is a substantial premium to the wider stock market and its own historical average.
It’s even pricey when looking further ahead. For example, BAE is forecast to achieve earnings per share of roughly £1 by 2028. That still puts the stock at 20 times forward earnings, even that far out.
If the projected European arms spending boom gets bogged down in politics, and BAE’s order backlog fails to grow, then investors may fall out of love with the stock.
Foolish takeaway
For investors new to the share, I think it’s still worth considering buying for the long term. But I don’t think it will repeat anywhere near 50%+ gains over the next 12 months.
Nevertheless, I’ll be holding onto my own BAE shares. If the stock dips by double digits at some point, then I will take another look.
