Five years ago was certainly not too late to invest in BAE Systems (LSE: BA.) shares. The year 2021 was just before governments started to react to conflicts springing up across the globe. Hundreds of billions were earmarked in defence budgets. The BAE Systems share price flew up.
A £10,000 stake in BAE Systems shares in February 2025 is now worth £17,928. There are five years of dividends to add to that figure too. The shares are up 20% in 2026 alone! The party is over, isn’t it? It’s too late to invest in BAE Systems shares now, surely?
Port of call
The first port of call for many in evaluating a stock is the valuation. The most popular measure is to use the price-to-earnings (P/E) ratio to compare the share price to the money the company makes. BAE Systems trades at a P/E of 31, which is very high. The FTSE 100 average is 18 at the moment, for context.
Important counterpoint: high P/Es are the norm for growing companies. And on 18 February, BAE posted blockbuster results for the financial year 2025. The headline figures are that sales are up 10% and earnings per share up 10% year on year.
Taking into account growing earnings, the forecast P/E for the financial year 2027 is brought down to 23. I don’t think that’s unreasonable for a high-quality company. The big question then: is BAE Systems a high-quality company?
A lot of people think we don’t make stuff in this country anymore. That’s simply not true. The UK is still a global leader in certain industries and defence is one of those.
What about the US – that global military hegemon? Is that not where the state-of-the-art defence manufacturing is found? Well, guess who BAE’s biggest customer is that accounts for 50% of revenues (clue: it’s the US).
Flash in the pan?
Investors should be aware of the risks too. One unusual and somewhat unsavoury aspect of investing in a stock like that is the correlation with wars and conflicts around the globe. It’s no accident that BAE Systems has built to a record £80bn backlog while the world is in something of a fractious state.
This creates an unwelcome paradox where peaceful resolutions to some of the worst conflicts will be bad news for the stock. This presents an ethical dilemma, for one thing. But a few successful rounds of peace talks could take a large dent in the share price.
For my money, I don’t think the current increased levels of defence spending will be a flash in the pan – whatever happens in geopolitics in the years to come. The ‘peace dividend’ era looks to be finally over. That makes the best and brightest defence stocks like BAE Systems worth considering. If you ask me, I don’t think it’s too late to invest here.
