With another war starting in the Middle East, it’s not surprising that the FTSE 100’s energy companies are benefitting from soaring commodity prices. But at the time of writing (4 March), there’s one stock outside the sector that’s performed even better over the past three days.
With huge market uncertainty at the moment, why is this particular stock doing so well? Let’s take a closer look.
Bucking the trend
Since the start of trading on Monday (2 March), the BAE Systems (LSE:BA.) share price has been the FTSE 100’s best performer, beating both Shell and BP.
And as distasteful as this might be to some investors, many others clearly believe that the defence contractor will be one of the beneficiaries of the current conflict, with the countries involved seeking to replenish their weapons supplies. In addition, those nations not directly affected may want to buy more equipment to protect themselves in the future.
The direction of travel is clear. President Trump has stated that he wants to increase defence spending by 50% in 2027. And with 46% of the group’s 2025 revenue coming from the US, it’s obviously established some valuable commercial relationships in the country. Last year, nearly 11% of its income was derived from Saudi Arabia and Qatar, both at the epicentre of the current conflict.
More widely, NATO members, including the UK, have committed to spend up to 3.5% of GDP on core military-related activities by 2035. And there’s evidence that this trend is already underway. In 2025, the group received orders of £36.8bn. At the end of the year, its total order backlog was £84bn, nearly three times its annual sales.
Over the past five years, the group’s revenue has increased by an average annual rate of 8%. And this has flowed through to its bottom line. Earnings per share have risen by an average of 12% a year.
Things to be aware of
Having said that, income investors are likely to want to consider other stocks. BAE Systems is currently yielding a disappointing 1.6%. But it’s increased its payout for 22 consecutive years. Of course, there are no guarantees this will continue.
A £1.5bn share buyback programme is also underway. However, President Trump has threatened that he won’t do business with defence contractors that buy their own shares.
Another challenge is that military programmes are operationally difficult to deliver and are usually covered by fixed-price contracts. Get it wrong and the cost implications could be huge.
And generally speaking, governments like to buy local. If the US administration decides to place its business with an American supplier, the implications for BAE Systems would be enormous. Furthermore, should the world become a more peaceful place – let’s hope it does — defence spending’s likely to slow.
A final thought
The British Prime Minister has described events in the Middle East, which are playing havoc with global stock markets, as “serious and volatile”. The defence sector is one of very few industries that’s likely to avoid the worst of the fallout. And as a supplier of all types of military equipment, BAE Systems is better placed than most to prosper.
That’s why I believe those investors who are comfortable with the sector could consider the group’s shares.
