A solid year for the FTSE 100's biggest defence name

BAE Systems has had a strong but not spectacular year by recent standards. The shares are up 16.19% over the twelve months to 1 May 2026, slightly behind the FTSE 100's 21.36% rise but extending a multi-year run during which the stock has handsomely outperformed the broader market. The result reflects continued execution against a backdrop of rising global defence budgets, a record order Backlog/">Backlog, and substantial new programme awards across its core platforms. With sales reaching £30.7 billion in 2025 and the order Backlog/">Backlog at a record £83.6 billion, BAE has now firmly entered what its chief executive Charles Woodburn has described as a "new era" of defence spending.

For UK investors, BAE remains the largest single defence pure-play on the London market and one of the deepest international exposures to the structural rise in security spending across NATO and allied countries. The 16.19% one-year gain understates the cumulative compounding that holders have enjoyed: dividends, Buybacks/">Buybacks and a rising share price have together produced very attractive total returns over the past five years.

Latest results: a record across multiple metrics

BAE Systems published its 2025 full-year results in February 2026. Sales rose 8% to £28.3 billion, while operating profit increased 9% to £2.93 billion. Including joint ventures, group sales reached a record £30.7 billion, up 10%. Free Cash Flow was strong, dividends were raised, and the buyback programme remained active.

The headline number drawing most attention was the order Backlog/">Backlog: £83.6 billion at year end, up £5.8 billion from £77.8 billion a year earlier. The Air segment in particular saw Backlog/">Backlog rise from £26.8 billion to £32.6 billion, reflecting major Eurofighter Typhoon orders and ongoing growth in services and support. Submarines, electronic systems, platforms and services, and the cyber and intelligence businesses all contributed to the broader order book expansion.

Guidance for 2026 was bullish. Management expects sales to grow 7–9% in 2026, with cumulative free Cash Flow between 2026 and 2028 expected to exceed £6 billion. That level of cash generation supports continued Dividend/">Dividend growth, further Buybacks/">Buybacks, and meaningful Investment/">Investment in production capacity to fulfil the order Backlog/">Backlog.

Eurofighter, GCAP and the air Business/">Business

The most discussed development in the past year has been the resurgence of the Eurofighter Typhoon programme. After a period in which order intake had been sluggish, a sequence of new contracts has filled the production pipeline well into the 2030s. A £4.6 billion package agreed with the UK and Turkey for 20 Typhoons and an associated weapons package, additional orders from Spain, Italy and Germany, and Turkey joining as a new customer, have together extended production deliveries into the mid-2030s. BAE has explicitly stated that the Eurofighter pipeline is now full until the start of final assembly of the sixth-generation aircraft being developed under the Global Combat Air Programme (GCAP) — an unusually long and cleanly visible production runway for any combat aircraft programme.

GCAP itself, which is the UK-Italy-Japan Partnership/">Partnership to develop a sixth-generation fighter aircraft (the UK programme is named "Tempest"), is now in detailed design with a target service-entry date later in the 2030s. The programme builds on the long-standing Eurofighter relationship and ensures that BAE's combat air Business/">Business has visibility well beyond the current Typhoon production cycle. A separate $610 million contract for advanced Eurofighter radars, awarded in early 2026, illustrates the kind of incremental capability work that continues to flow alongside the platform itself.

In adjacent capability work, BAE has been actively trialling lower-cost weapon Options/">Options for the Typhoon, including an Advanced Precision Kill Weapon System (APKWS) trial that targets cost-effective counter-drone and counter-aircraft applications. These trials sit within a broader sector trend towards more affordable, more numerous munitions to address the operational lessons of recent conflicts.

Submarines and the AUKUS opportunity

BAE's submarines Business/">Business, headquartered at Barrow-in-Furness, builds the UK's most sensitive defence platforms. The Astute class is winding down and the Dreadnought class — the UK's next-generation ballistic missile submarines — is well into construction. Looking further out, BAE has secured the prime contract for the SSN-AUKUS programme, the next-generation nuclear-powered attack submarine class for the UK and Australian navies, with deliveries scheduled into the late 2030s and beyond.

The implications for BAE are profound. SSN-AUKUS extends submarine capability work into the 2040s and 2050s, requires significant additional capacity at Barrow, and creates collaboration with Australian industry as the programme's joint design and production progresses. The combination of Dreadnought, SSN-AUKUS and ongoing Astute through-life support gives BAE one of the most secure long-term Revenue/">Revenue streams in the entire defence industrial complex.

The land Business/">Business, electronic systems and the US

Outside air and submarines, BAE's land Business/">Business — including combat vehicles such as the AMPV in the United States and the Boxer programme in Europe — has continued to grow. The 2024 Acquisition/">Acquisition of Ball Aerospace from Ball Corporation expanded BAE's Electronic Systems Business/">Business significantly in the US, adding capability in space technology, advanced sensors and instrumentation. Integration has progressed broadly to plan, and the Electronic Systems segment now contributes meaningfully to group Revenue/">Revenue and profit.

The US Business/">Business overall — encompassing land combat, electronic systems, intelligence and cyber — represents roughly 45% of group Revenue/">Revenue, comfortably the largest single geography. That gives BAE a substantial exposure to US defence spending, which remains the largest in the world by a significant Margin/">Margin and which has continued to grow in nominal terms despite political Volatility/">Volatility around the budget process. BAE's "buy America" credentials (its US Subsidiary/">Subsidiary is structured as a Special Security Agreement entity) have allowed it to compete effectively for sensitive US programmes despite its UK parentage.

Sector and macroeconomic backdrop

The structural defence Demand/">Demand backdrop is the strongest in a generation. NATO members are largely committed to spending at least 2% of GDP on defence, with the UK and several others tracking towards 3% over the medium term. The war in Ukraine, the rising importance of indigenous defence industrial capacity in Europe, and the strategic competition with China have together produced a coordinated policy push for higher defence outlays. New formats — including the European Sky Shield Initiative, multinational munitions procurement, and shared development programmes — are creating additional opportunities for established prime contractors.

A particular feature of the current cycle is the move from order books built around a small number of high-end platforms to a more diversified mix that includes affordable munitions, autonomous systems, electronic warfare, and resilience infrastructure. BAE's portfolio, which spans platforms, electronic systems, munitions and services, is well positioned for that Diversification/">Diversification.

Currency dynamics, with the US dollar comprising a significant share of BAE's Revenue/">Revenue, can introduce noise but the underlying trends in spending have been broadly supportive across major currencies.

Broker and investor sentiment

Broker opinion on BAE Systems is broadly positive. Most major firms have a Buy rating, with price targets reflecting confidence in the multi-year Earnings/">Earnings growth implied by the order Backlog/">Backlog and guidance. Some commentators have begun to debate the appropriate valuation multiple for a defence prime contractor with such strong visibility, with historical references suggesting that defence stocks have rarely traded at such extended multi-year forward Earnings/">Earnings outlooks.

Long-only institutional ownership has broadened materially, with both UK and global mandates building exposure. ESG-conscious investors have been more willing to engage with defence as a category in recent years, and BAE specifically benefits from the strategic-importance argument for European industrial sovereignty.

Risks and opportunities

Risks include programme execution at scale: the order book contains hundreds of programmes at varying stages, and cost overruns or schedule slippages on any of the larger ones could affect headline numbers. Political risk on US defence budgeting, particularly around the timing of appropriations, can create quarterly noise. A peace deal in Ukraine, while welcome strategically, could moderate some of the more extreme upward pressure on European defence outlays in the medium term.

Opportunities include continued growth in international Eurofighter and GCAP work, expansion of submarines including AUKUS-related orders, growth in the US Electronic Systems Business/">Business off the Ball Acquisition/">Acquisition, and selective acquisitions in adjacent capability areas. Munitions, where BAE has been investing in capacity, is a particular growth area driven by the operational tempo of recent conflicts and the resulting need to refill stockpiles.

Capital/">Capital returns and Capital/">Capital allocation

BAE's Capital/">Capital allocation framework prioritises Investment/">Investment in capacity to fulfil the growing order book, alongside a progressive Dividend/">Dividend and share buyback. The 2025 results saw the Dividend/">Dividend raised again, with the buyback programme remaining active. Management has indicated that the higher cumulative free Cash Flow expected through 2026–28 — in excess of £6 billion — will support continued Capital/">Capital returns even as the company invests in additional production capacity, particularly in munitions and submarine programmes.

M&Amp;Amp/">Amp;A has been used selectively. The Ball Aerospace Acquisition/">Acquisition in 2024 was the most significant deal in recent years and is performing in line with expectations. Smaller bolt-ons in cyber, electronic systems and adjacent capabilities are likely to continue, while large transformational deals appear less probable given the programme-rich environment in which the company is already operating. Investors should expect Capital/">Capital allocation to lean towards organic Investment/">Investment and modest Buybacks/">Buybacks rather than headline-grabbing M&Amp;Amp/">Amp;A, at least over the next two to three years.

The munitions opportunity in detail

One area worth specific attention is the munitions and weapons Business/">Business. Lessons from the war in Ukraine have made painfully clear how quickly modern combat operations consume munitions, and how thin Western inventories had become before the conflict began. NATO members have responded by ordering refills of artillery shells, missiles, and other consumables at unprecedented volumes, and by funding capacity expansions. BAE has been investing in additional production capacity for several munitions categories, with new facilities and shifts coming online to expand Supply/">Supply.

For BAE specifically, munitions Revenue/">Revenue is meaningful and growing, but it has historically been a smaller share of group Revenue/">Revenue than platforms such as Eurofighter or submarines. As capacity ramps and orders flow, the contribution from munitions could become a more significant component of growth. Importantly, munitions are typically higher-Volume/">Volume and shorter-cycle than platforms, which can provide a useful complement to the long-cycle programme Business/">Business that dominates BAE's overall mix.

Conclusion

BAE Systems has had another year of solid execution against an exceptionally strong Demand/">Demand backdrop. A record order Backlog/">Backlog, strong cash generation, growing dividends and a credible multi-year growth outlook have together supported a 16.19% share price gain over the past twelve months. The "new era" of defence spending described by management appears genuine, and BAE's positioning across air, submarines, land, electronic systems and the US Business/">Business gives it broad exposure to the trend.

For investors looking for one-stop access to the structural rise in global defence Demand/">Demand, BAE remains the most obvious large-cap UK exposure. The combination of programme visibility, geographic Diversification/">Diversification and reliable Capital/">Capital returns has built a high-quality compounding profile that has performed well through several cycles. Future returns will depend on continued execution against a still-favourable backdrop, with the principal sensitivity being political rather than commercial.