The Essential Stock, BAE Systems, is Primed for More Growth.

Rising geopolitical tensions and security concerns mean the demand for defence capabilities is rapidly growing. The UK's BAE Systems was one of the first stocks in my portfolio in anticipation of this trend and forms a not insignificant part of that portfolio. Today's H1 results are a vindication of that decision, with profit guidance raised for full-year results. With its share price up 55% so far this year, this leading global defence and aerospace group has a strong history and is set to benefit for at least the remainder of the decade. Investors should consider waiting for a short-term pullback, or sell-off, and pile in when that happens.

Company Overview and Historical Context

BAE Systems has over a century of experience in defence and technology. Originally focusing on serving the British military, this behemoth is now a globally recognised prime contractor for defence solutions. Serving NATO allies highlights its critical role in international security, and examples like highlight that, over the years, BAE has diversified its offerings, developing advanced systems including: naval vessels, military vehicles, and cybersecurity solutions. The shift from a national provider to a global leader illustrates BAE's adaptability while navigating the changes in the geopolitical landscape.

The Eurofighter Typhoon, a fighter jet produced by BAE Systems (and others including Airbus), soon to be replaced by another jet produced by BAE Systems

Recent Performance Metrics

Today's H1 results show BAE won £13.2 billion worth of new orders since the start of the year, including a $1.2 billion contract for the U.S. Space Force and a £1 billion contract with the UK government to build the next-generation Tempest fighter jet. Investments in drone warfare have also paid off, helping the company to report that since January sales rose 11% and underlying earnings before interest and tax rose 13%. To give back to shareholders, the company has today announced it will raise its already enviable dividend by 9%

This is off the back of strong results for 2024, when revenue grew 14%, underlying operating profit climbed 14% to reach £3.0 billion, and earnings per share (EPS) increased by 4.3%, hitting 60p. BAE's order book also saw a remarkable increase, reaching a record £77.8 billion, which ensures revenue visibility for the coming years. Such performance underscores the company's operational efficiency in a competitive market.

Such excellent results are a result of effective contract management and the escalating global defence budgets that are driven by geopolitical uncertainties; uncertainties unlikely to pass anytime soon.

Market Position and Defence Spending Dynamics

BAE Systems maintains a strong market position, especially within the UK defence sector. The company benefits from robust government defense budgets, which are expected to rise further. For instance, NATO allies must soon increase their defense spending to 5% of GDP by 2035. This commitment promises ongoing demand that can be satisfied by BAE’s extensive product range. By leveraging its experience and building strategic partnerships, the company positions itself well to capture emerging opportunities as defense programs grow and adapt.

Research and Development As a Strategic Pillar

Innovation is vital in the defence sector, and BAE Systems invests heavily in research and development (R&D). In 2024, the company allocated approximately £2 billion to R&D - around 7% of its revenue. This investment in innovation can be seen in its initiatives like FAST Labs, which focuses on developing next-generation defence technologies.

Additionally, BAE's collaborations in key areas such as hypersonics, electronic warfare, cyber, and green aviation demonstrate its commitment to addressing both current challenges and future threats. With a strong focus on R&D, BAE remains at the forefront of technological advancement, essential for sustaining a competitive edge in the defence industry.

Strategic Investment Outlook

Nothing is a sure bet, world peace may come tomorrow. Further, many will point out that the future value of BAE could be priced in. However, those people said exactly the same thing a year ago, before this year where the stock's performance has seen impressive feats like a 20% jump in just one day, amid weeks and months of consistent growth. Investors may consider the mild pull-back in BAE's share price since June's record high as a sensible entry point.

In a world plagued by tariffs, some players have seen consistent demand and ridden out trade wars owing to their strategic positioning.

BAE Systems continues to stand as a promising investment option. Its long-established presence, strong market position, and resilient cash flow generation provide a solid foundation for growth. Coupled with improved profit margins and alignment with global defence spending trends, BAE Systems is well-positioned to benefit from the continued anticipated increase in defense expenditures driven by geopolitical strife. As you evaluate your investment strategy, consider how BAE Systems aligns with your goals, especially in light of the escalating demand for advanced defense capabilities around the globe.