Rising more than three-fold since January 2021, the BAE Systems (LSE:BA.) share price has been one of the FTSE 100’s star performers. However, it’s an uncomfortable truth that the catalyst for much of the increase was Russia’s invasion of Ukraine.
A £10,000 investment made just before Vladimir Putin ordered his country’s troops to cross the border on 24 February 2022, would now be worth £33,639. And shareholders would have banked some dividends too.
But in an ever-changing world, what might the next five years have in store for Britain’s biggest defence contractor?
The elephant in the room
Investing in the defence industry is controversial. Having said that, European Union funds that promote environmental, social, and governance (ESG) principles, have actually increased their exposure to the sector since 2022.
Maybe investors are taking their lead from Sir Keir Starmer, who said in June 2025: “My first duty as Prime Minister is to keep Britain safe.” As a consequence, the UK government’s pledged to work towards spending 5% of GDP on defence, in line with NATO’s target. And as the biggest supplier to the Ministry of Defence, BAE Systems is likely to benefit.
But its single-most important customer is the US Department of Defense (now, in a sign of the times, known as the Department of War). Overall, America contributed 44% to the group’s sales revenue in 2024. Significantly, President Trump has called for defence spending to be 66% higher in 2027, than it will be this year.
Possible challenges
Despite this backdrop, there are no guarantees that BAE Systems will succeed. That’s because the nature of war is changing.
For example, artificial intelligence is now playing a role. It’s been used in Ukraine to help establish the most likely locations of the enemy and to quickly analyse satellite and thermal imagery. A massive number of drones have also been deployed by both sides in the conflict. And it’s a frightening thought that, one day, the battlefield could be full of robots.
Cyberattacks and disinformation are also part of modern warfare. Space could also feature soon. And those underground cables that power the internet need to be protected. Some smaller, more agile defence contractors could respond faster to these emerging trends. However, BAE Systems has the financial strength to buy some of its smaller rivals should they pose too much of a threat.
As well as some ESG investors, I suspect those wanting generous levels of passive income might look elsewhere. The group’s share price rally means the stock’s now yielding a disappointing 1.7%. At the end of 2021, it was offering a potential return of 4.6%.
Final thoughts
Admittedly, the group’s shares aren’t cheap. But I think its high earnings multiple reflects a belief that it will continue to grow rapidly as a result of increased global uncertainty. This makes sense to me. Despite some of the challenges outlined above, I think BAE Systems is well placed to respond and that’s why I reckon it’s a stock to consider.
But I doubt whether its shares will rise another 300% in five years. Yet I’d be surprised if they don’t rise significantly — along with many others in the sector — as a result of increased military spending. According to the United Nations, global defence budgets could rise by $3.9trn by 2035. That would be a staggering 244% increase on 2024.
