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BAE Systems (LSE: BA) shares should be soaring right now, if you ask me. The FTSE 100 company is Europe’s largest defence contractor and the continent is feeling jumpier than it has done in years.
Europe had grown accustomed to US military protection, but under President Donald Trump it can no longer take that for granted.
NATO members are going to have to step up their spending as the US pulls back, which should be good news for BAE.
Can this FTSE 100 stock fight back?
Yet, over the past year, BAE’s share price has climbed just 1.13%. Throw in the trailing dividend yield of 2.53% and the total return stands at a modest 3.66%.
A £10,000 investment a year ago would be worth just £10,366 now. By contrast, a simple FTSE 100 tracker would have lifted the same amount to £11,700, including dividends.
However, the long-term picture is stronger. Over five years, BAE Systems is up 88%, more than doubling an investor’s money with dividends reinvested.
One issue may be valuation. As the shares climbed, so did the price-to-earnings ratio, which topped 22 times last year.
There’s also uncertainty surrounding US defence policy. While Trump has expressed strong support for military spending, he’s also focused on reducing the national deficit. Some worry that could impact US weapons procurement. Trade war tariffs pose another threat.
Yet BAE’s recent results suggest demand remains robust. Full-year 2024 figures, published on 19 February, showed the company secured £33.7bn in orders, pushing its backlog to a record £77.8bn.
Revenues surged 14% to £28.3bn, while underlying earnings before interest and taxes rose 14% to more than £3bn. Free cash flow of £2.5bn funded a 10% dividend hike.
Despite these solid numbers, the share price dropped 11%. That reaction puzzled me. Profit-taking might explain it, but given the lacklustre short-term gains, it’s hard to see why.
One silver lining: that P/E now looks more reasonable. BAE shares trade at 18.3 times earnings, only slightly above the FTSE 100 average of around 15. Given the security of its vast order book, I expected a higher premium.
Long-term buy and hold
Some ESG-focused investors remain wary of defence stocks, but that sentiment has softened as Russia menaces.
I bought BAE shares last year and have been disappointed by their short-term performance. But I’m not worried. I view this as a long-term play. I plan to hold for at least five, 10, or even 20 years. Unless the world suddenly embraces love, peace, and understanding (it won’t), BAE should continue to thrive.
Analysts predict a one-year median target price of just over 1,512p, suggesting a potential 16% rise from here. With the dividend, that could deliver a total return of nearly 20%. No guarantees though
Achieving this depends on factors like sustained defence spending, effective order execution, and overall market conditions.
For those with a long-term view, BAE shares look well worth considering. I’m certainly not selling. At some point, BAE Systems will take off again. I want to be holding them when they do.
