After years of treading water, BAE Systems (LSE:BA.) shares finally took off in February 2022. Sadly, it was Russia’s terrible invasion of Ukraine that was the catalyst.
The FTSE 100 defence stock has risen every year since, including a 52.2% gain in 2025. And with the dreadful war still grinding on, it’s up another 4.8% in 2026.
Add in the dividend, which jumped from 25.1p in 2022 to 36.3p last year, and this has been a tremendous investment for me.
However, I’m a little disappointed because BAE was trading above 2,300p back in March. Now, it’s slipped under 1,850p, and is even slightly underperforming the FTSE 100 year to date.
The question I’m asking myself now is, should I buy more shares? Or sell up?
Reassuring update
In May’s trading update, CEO Charles Woodburn reiterated full-year guidance for a 7%-9% rise in sales (from £30.7bn last year) and 9%-11% growth in underlying earnings per share (EPS).
In March, BAE signed a £2.5bn contract to provide training and support equipment for Türkiye’s Eurofighter Typhoons. And the UK government recently committed £8.6bn to the Global Combat Air Programme, which is the joint UK-Italy-Japan project to build the successor to the Typhoon.
By May, the defence giant had also completed £930m of its three-year £1.5bn share buyback programme. There are no balance sheet concerns.
Does the stock look cheap?
Looking ahead, the dividend appears well covered by expected earnings, with 9% and 11% growth pencilled in for 2026 and 2027, respectively. While the forward dividend yield is only 2.3%, and nothing is guaranteed, BAE has grown its annual payout for 22 consecutive years.
Turning to valuation, the stock looks quite attractive. Based on EPS forecasts for 2027, the forward-looking price-to-earnings (P/E) ratio is 19.4. That’s not far above the 10-year average forward P/E multiple of roughly 14.5.
Around the world, security threats continue to grow, leading governments to increase defence spending…We expect significant opportunities across our business, including space systems, missile and air defence systems, drones and counter drone technology, electronic warfare, combat aircraft, combat vehicles, frigates and submarines.
BAE Systems
Drone warfare
Last we heard, BAE’s multi-year order backlog had reached £83.6bn. Yet NATO spending is still expected to rise over the next decade, while the on-off Iran conflict is driving higher defence spending in the Gulf states, which are customers of BAE.
That said, the Iran and Ukraine conflicts have shown how swarms of cheap drones can cause havoc on traditional military hardware. Could low-cost autonomous weapons be prioritised over BAE-built tanks and legacy fighting vehicles?
It’s certainly possible. As Rafal Rohozinski, a senior fellow at the Centre for International Governance Innovation, pointed out recently in a Globe and Mail column: “The army NATO built to stop Soviet tanks is meeting a battlefield made transparent by $20 optics and ruled by hobbyist explosives.”
On the other hand, BAE is rapidly developing its own counter-drone products. In April, it secured a $180m contract from Sweden for its TRIDON Mk2 anti-aircraft system, which can engage drones.
Weighing things up, I think BAE’s worth considering for investors who don’t have ethical issues with defence stocks.
However, as it’s already one of my larger UK holdings, I’m going to hang fire until the firm’s half-year results on 30 July before plotting my next move.
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Ben McPoland owns shares in BAE Systems.
