Summary
- European defense budgets are ramping to 3‑5 % of GDP, pushing BAE’s backlog to a record £77.8 billion—roughly three years of revenue locked in.
- A truly diversified arsenal—fighters, frigates, munitions, cyber, and now space via Ball Aerospace—makes BAE less exposed to any single program or country.
- Margin upside is hiding in plain sight: Ball’s 11.7 % margin electronics and a new Welsh shell plant could lift group margin ~40 bps over three years, a boost most models still ignore.
- Cash engine remains strong: free cash flow set to top £1.1 billion in 2025, supporting a 21‑year dividend growth streak (33 p per share) and a £1.5 billion buyback.
- Valuation still fair at about 23x forward earnings and 15x EV/EBITDA—below premium peers like Saab—with clear visibility on 8–10 % annual EPS growth and a 1.8 % yield.
Introduction
War in Ukraine has done what decades of post-Cold War politics couldn’t: it forced Europe to take defense spending seriously. NATO is pushing toward 5% of GDP for the first time, with leaders now treating defense budgets as untouchable. It is reshaping the European defense sector at a speed few expected. For BAE Systems, this moment is more than a tailwind—it’s a transformation of the business and its future.
In the past 18 months, BAE has watched its order book swell to nearly £78 billion, about 3 times its annual revenue. Contracts for jets, ships, and missiles are rolling in from across Europe, the U.S., Australia, and the Middle East. After a 14% jump in revenue last year, the company now guides for another 7–9% gain in 2025, with high-single-digit earnings growth to match. The company’s performance, driven by both urgency and execution, has put BAE back on the radar of long-term investors and professionals alike.
The Spending Boom Is Lasting
European governments are signing multi-year contracts, expanding their stockpiles, and investing in new technology. The U.K. is on track to hit 2.5% of GDP for defense by 2027, and Germany’s €100 billion defense fund has jumpstarted programs that were stuck for years. The May trading update confirmed that BAE’s pipeline is as full as ever: armored vehicles, frigates, and advanced sensors all secured new deals. The result is a record backlog that stretches into the 2030s.
But the change isn’t just in the numbers. BAE’s business model is being hardened for a world where big military budgets are here to stay. It is shaping the future with programs like the next-generation Global Combat Air Programme and AUKUS nuclear submarines. The diversity and length of these contracts offer a rare kind of visibility. Even if fresh order intake cools, the funded backlog alone keeps production humming for years.
The Right Place at the Right Time
What sets BAE apart in Europe is not just its size, but its scope. BAE operates in every domain—air, land, sea, cyber, and, with the Ball Aerospace acquisition, space. Its 2024 revenue broke down to roughly 30% from air, 25% from electronic systems, 22% from maritime, 15% from platforms and vehicles, and 8% from cyber and intelligence. No other European peer has that reach.
Unlike Thales (which is strong in electronics) or Leonardo (focused on helicopters and aerospace), BAE gets to participate in every major defense contract, from munitions to nuclear submarines. The company’s international split is a second strength: 44% of sales come from the U.S., 26% from the U.K., 13% from the Middle East, with the rest spread globally. This means BAE isn’t hostage to the mood swings of any single government or parliament. If European budgets plateau, rising orders from Washington or Canberra can take up the slack.
Consistent Growth
BAE is delivering the kind of steady, repeatable growth that makes for a compounding investment. In 2024, sales rose 14% to £28.3 billion, while underlying EBIT reached £3 billion, up another 14%. Margins held steady above 10%, a solid result given input cost pressures. Free cash flow came in at £2.5 billion, though this did get a lift from large customer advances. Even stripping that out, cash generation remains healthy, with management guiding for more than £1.1 billion in free cash flow for 2025.
Dig into the details, and the breadth becomes clear. Electronic Systems, boosted by Ball Aerospace, saw sales jump 35%. Platforms & Services grew 15% on the back of armored vehicles and artillery. Maritime kept pace, adding 12% thanks to new ship and submarine programs. Even the slower-moving cyber unit is now growing. The story is not one of flashy outperformance, but reliable execution across the board.
The Dividend
For income investors, BAE stands out among defense names. The company has raised its dividend for 21 years running. The 2024 payout was hiked 10% to 33 pence a share, offering a yield close to 2%. It is backed by solid cash conversion and a manageable payout ratio. Alongside the dividend, BAE started a £1.5 billion share buyback last summer and has already retired nearly £400 million in shares.
Where some peers still play catch-up—Thales at a 1.5% yield, Leonardo just getting back to payouts—BAE delivers both growth and income. The policy is balanced: invest in new tech and production, but also reward shareholders who wait out the cycle.
Valuation: Still Room to Run
After a 50% run-up in the stock, is BAE still worth a fresh look? The answer depends on what you want from a defense holding. At about 23x forward earnings and 15x EV/EBITDA, BAE isn’t cheap. But compared to peers, the valuation is fair. Saab, with a narrower product slate, trades above 40x. Thales is near 23x but carries less international heft. Leonardo is cheaper, around 20x, but comes with Italian political baggage and higher debt.
What you get with BAE is certainty. The consensus expects about 9% EPS growth a year for the next few years. Even if the multiple stays put, that kind of earnings growth plus a 2% dividend offers low double-digit total returns. In an era where market returns are harder to find, steady beats flashy.
Risks Are Not Extreme
No defense company is immune to risk. A surprise diplomatic breakthrough, a budget cut, or a failed project can all bite. Yet BAE’s backlog, customer spread, and mix of long-cycle programs create a strong buffer. If Germany or the U.K. slows its spend, Australia’s submarine orders or U.S. munitions contracts can keep factories running. Most of BAE’s big programs—AUKUS, GCAP, new frigates—run for decades and can’t be unwound quickly.
Execution is the main thing to watch. Major ship and jet projects always risk overruns. The Ball Aerospace deal needs to be digested without distraction. And with 44% of revenue in dollars, sharp moves in the pound can hit earnings. The company hedges most of its currency risk, but FX remains a variable to monitor. Still, none of these risks feel existential, and the management team has shown discipline through the last 5 years.
Where the Story Could Surprise
Most investors get the basic BAE story: big order book, global presence, dividend payer. What’s less appreciated is the company’s early position in areas likely to see disproportionate growth—space, electronic warfare, and advanced autonomy. The Ball deal brings high-margin satellite work, and BAE’s jamming gear and drone tech are finding new markets. As drone and missile threats grow, so will demand for the systems BAE is building.
Another catalyst: the AUKUS submarine project is just starting. Full-rate production and sustainment contracts in Australia could become a significant profit center into the 2030s, even as European defense spending levels off. With governments focused on technology sovereignty and local production, BAE is well-placed to benefit as both a builder and an integrator.
Final Take: A Steady Compounder for the New Era
BAE Systems is not a momentum stock or a get-rich-quick play. Instead, it is a classic compounder: steady, cash-rich, and insulated from economic shocks by government contracts. Its position in Europe’s defense build-out, together with a large U.S. footprint, is hard to match. The company’s backlog ensures visibility. The balance sheet is strong. Management is returning capital without starving future growth.
There are faster ways to play the current defense cycle, but few as reliable. I expect BAE to deliver high-single-digit earnings growth, matched by a steadily rising dividend, for years to come. If shares stay at this multiple, returns will follow earnings. If the market decides to give BAE a premium for its stability, the upside is higher still.
My rating remains Strong Buy for long-term investors willing to look beyond headlines and stay patient as the story unfolds. In a world where global tensions may ebb and flow, owning the region’s premier defense contractor looks like the kind of low-drama, high-visibility investment that can quietly anchor a portfolio.