FTSE 100 shares BAE Systems and Babcock International have been on fire in recent years and the Prime Minister may be about to do something that means this continues.
First some context. Both rank among the Footsie’s top five performers over the past five years, along with Rolls-Royce, Airtel Africa and Fresnillo.
Here are the returns from this magnificent quintet of UK shares.
| Five-year return (excluding dividends) | |
|---|---|
| Rolls-Royce | 1,219% |
| Babcock International | 471% |
| Airtel Africa | 321% |
| BAE Systems | 315% |
| Fresnillo | 274% |
The common theme for three of these is that they’re in the aerospace and defence sector. BAE Systems is an industry giant and Babcock operates the UK’s nuclear submarine bases. Meanwhile, Rolls-Royce has a thriving defence division.
All three stocks got a boost today (16 February), with Babcock jumping almost 4%. Shareholders can thank news surrounding the prime minister, Keir Starmer.
Spend more, faster
According to the BBC, Prime Minister Starmer is considering increasing defence spending faster than expected. Originally the government had announced plans to spend 2.5% of gross domestic product (GDP) on defence by 2027. This would rise to 3% by the next parliament.
However, the BBC reports that this 3% could be met by the end of this parliament (scheduled for 2029). Bringing this forward would cost billions of pounds.
At the Munich Security Conference over the weekend, the PM said: “To meet the wider threat, it’s clear that we are going to have to spend more, faster.”
Needless to say, spending more faster would benefit Babcock, which has a far higher proportion of sales tied to the Ministry of Defence than BAE. But this would benefit them all, including Melrose Industries, which owns GKN Aerospace and supplies military airframes and engines.
Of course, there’s a risk these stocks pull back if the UK government doesn’t rustle up the cash for this extra defence splurge. But looking at their respective share price rises today, the market’s clear which it thinks could benefit the most.
- Babcock +3.8%
- Melrose +3.8%
- BAE +3.1%
- Rolls-Royce +1.5%
AIM-listed gem
Before ending, I want to highlight another defence-adjacent stock that should benefit from higher military budgets. That is Filtronic (LSE:FTC), the smaller AIM-listed share that’s up 3.2% today.
The company designs and makes communication systems used in various sectors, including telecommunications (5G), defence, and space. For example, it provides radio frequency (RF) solutions for radar systems and electronic warfare.
But it’s satellite communication systems that have put a rocket booster under the share price. Specifically, strategic partner SpaceX, with whom it has signed a handful of contracts, including one worth $62.5m last year. This it to provide components for the rapidly expanding Starlink satellite internet service.
Revenue has surged from £16.3m in FY23 to £56.3m in FY25 (which ended in May). There’s expected to be a lull in growth this year due to the timing of the SpaceX orders, but Filtronic has a record order book and its next-generation GaN amplifier systems are set to be a “key driver of growth over the next three to five years“.
One thing to be aware of here is that SpaceX accounted for 83% of revenue last year, so there’s significant customer concentration risk. However, the firm’s diversifying its customer base, with large contracts being won with European space/defence contractors. Higher, faster spending should provide a further boost.
Naturally, some investors have ethical issues with defence-related stocks. But for those who don’t, I think Filtronic’s worth considering buying for the next five years.
