Rolls-Royce (LSE:RR) is the best-performer among all FTSE 100 shares over the past five years. And it’s not even close to the second-best-performer, with Lion Finance (+709%) a distant second behind Rolls-Royce’s astonishing 1,327% gain.
Yet BAE Systems (LSE:BA.) has also performed strongly, surging 286% over this time, with rising dividends on top.
Both BAE and Rolls-Royce are benefitting from higher defence spending, and this is set to continue moving forward. But which one do I prefer today? Here’s where I’ve got my money.
A rising defence tide is lifting all boats
Rolls-Royce’s Defence division makes engines for military transport and patrol aircraft, as well as being the sole supplier of naval nuclear propulsion to the UK Ministry of Defence. Today, defence makes up around 23% of total revenue.
However, this unit has structurally lower margins than the engine maker’s other two divisions. In 2025, the operating margin here was 14.4% versus 20.5% for Civil Aerospace and 17.4% for Power Systems.
Rolls-Royce stock therefore offers investors exposure to rising defence spending, as well as international travel trends and power generation growth driven by data centres.
The firm also has its burgeoning small modular reactor (SMR) business, which has won contracts to build SMRs in the UK, Czech Republic, and most recently Sweden.
By contrast, BAE is a pure defence play, with operations spanning land, air, sea, space and cyber. The operating margin is lower at 10.3%, but the company’s order backlog reached £83.6bn last year, up from £69.8bn in 2023.
Both companies are involved in the Global Combat Air Programme (GCAP). This is the joint project between Britain, Italy and Japan to design and build a new stealth fighter jet.
Whereas a rival programme between France and Germany collapsed in June, the UK government has just committed £8.6bn over four years to GCAP.
We hold a significant share in the GCAP programme, which we believe will be a leading combat aircraft programme with significant export opportunity potentially larger than Eurofighter. GCAP production is expected to ramp up in the mid-2030s.
Rolls-Royce.
Risks to bear in mind
Some investors worry that government priorities are shifting from big defence projects like aircraft carriers and frigates to drone warfare. If so, that could be a long-term growth threat to BAE, whose share price is down 13% since March.
Meanwhile, Rolls-Royce’s SMR business will face fierce competition from GE Vernova Hitachi Nuclear Energy. Indeed, Poland-based SGE just announced plans to build 14 SMRs in the UK, using GE Vernova Hitachi’s BWRX-300 technology.
Rolls-Royce stock is also expensive, trading at almost 37 times forward earnings versus BAE’s 22.5. Therefore, a lot of future growth is already priced in, creating valuation risk were these expectations not to be met.
Which looks more attractive?
So, where do I have my money? In both, actually, as I’m bullish on Rolls-Royce’s longer-term growth opportunities beyond its present core operations.
These include:
- A total addressable market of 400+ SMRs.
- Advanced Modular Reactors (AMRs), which are more flexible powerplants with potential uses in defence power.
- Narrowbody aircraft.
As for BAE, it’s investing heavily in future technologies. These include electronic warfare, uncrewed and counter-drone systems, laser-guided weapons, and space solutions.
I’m holding both. But if I had to chose today, I think BAE looks better value, and is worth considering around £20.
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Ben McPoland owns shares in BAE Systems and Rolls-Royce.
