BAE Systems (LSE: BA.) shares are one of the FTSE 100‘s top performers over the last five years. Only three other Footsie stocks have bagged a better return than the defence firm’s 319% rise in share price.
The underlying reasons for the surge are very interesting. And, most importantly, could continue long into the future. Here’s why.
Flurry of orders
One of the interesting aspects of defence companies is that their customers are almost exclusively governments. This tends to make for reliable cash flows, and it also means future earnings can be more predictable.
This phenomenon played out recently with BAE Systems shares. In the wake of Russia’s invasion of Ukraine, the head honchos of many NATO members were talking about bumping up their defence spending by double or triple.
What came after? A flurry of orders for BAE Systems from those very same countries. Deals include 20 Eurofighter Typhoon jets for Turkey, an RAF advanced radar upgrade, and 40 Paladin Howitzers for the US. These deals are all from just the last couple of months too. The company’s order backlog is in the many dozens of billions now.
And what’s coming next? The two countries to keep an eye on are the US (about 50% of sales) and the UK (about 20%) – both of which might ramp up spending massively in years to come.
A certain red-capped president has spoken of increasing the defence budget by over 50% – that works out to the tune of around $500bn.
Britain might go one step further, in percentage terms at least, as a 5% of GDP total on ‘National Security’ has been proposed by the year 2035. That’s more than double the figure of 2.3% for 2024.
And there is the £28bn shortfall in defence spending to make Britain ‘war ready’ that has come out in recent days too.
Worth it?
Time to pour a little cool water on the flames here. There’s a lot of talk going round, none of which is binding. And the esteemed President Trump has built something of a reputation of saying things that don’t end up happening.
And all of which is ignoring the real best-case scenario: the number of conflicts around the worlds subsides. In particular, if the awful goings on in Ukraine come to an end then those defence spending targets may not need to be followed up on.
That brings me to another important detail: this is a company that produces weapons that are used in war. While the counter-argument is that a strong defence is a strong deterrent, there is an ethical aspect to investing here that may not sit well with everyone.
With all that being said? Defence manfucturing is one of the few areas where Britain is still world-leading. And BAE Systems – Europe’s largest defence contractor – could be a solid FTSE 100 investment in the years to come. I think it’s worth considering for any portfolio.
