BAE Systems’ full-year sales rose 10% to £30.7bn, at the top end of company guidance. All divisions contributed positively, with Platforms & Services growing at the fastest pace, up 17%.
Underlying operating profits grew by 12% to £3.3bn, slightly ahead of market forecasts. The order book grew by £5.8bn to a record £83.6bn.
Free cash flow fell from £2.5bn to £2.2bn (£1.4bn expected). Net debt, including lease liabilities, improved from £6.9bn to £5.6bn.
In 2026, sales and underlying operating profits are expected to grow between 7-9% and 9-11% respectively.
A final dividend of 22.8p per share was announced, taking the full-year total to 36.3p, up 10%.
The shares rose 2.5% in early trading.
Our view
BAE Systems delivered another solid year of growth, with profits edging past market expectations. With rising global defence budgets and a strong demand outlook, profits are expected to continue growing at double-digit rates in 2026, which pleased markets on the day.
At its core, BAE Systems manufactures heavy-duty military equipment like fighter jets, aircraft and submarines. With NATO members committing to boost defence spending from 2% to 5% of GDP by 2035, BAE looks well-placed to benefit from this long tailwind and capture some of this extra spending.
Despite being a UK-based company, nearly 45% of its sales come from the US, making it the largest single contributing region. On an absolute basis, US military spending trumps any other country in the world, so having large exposure to this market is proving very beneficial.
BAE doesn’t expect to be materially impacted by tariffs as they currently stand. The vast majority of equipment it delivers to its US customers is being produced in-country, with largely domestic supply chains.
Demand for the group’s products and services remains strong, with the order book rising to a record £83.6bn. Because these are typically long-cycle orders, with revenues spread over several years, it gives BAE multi-year revenue visibility. That’s an enviable asset to have and helps underpin a prospective dividend yield of 2.0%. Please remember no dividend is ever guaranteed.
But keep in mind that profitability hinges on its ability to estimate future costs. The long-term nature of many contracts means that the related risks and costs can change over time. Currently, potential supply chain issues and production delays have been called out by management as the main trip hazards.
BAE is making good progress in reducing debt levels following its £4.4bn acquisition of Ball Aerospace back in early 2024, so the balance sheet is in good shape. Current guidance for free cash flow in 2026 looks a touch conservative in our view, so we expect this to move higher as the year progresses. If that happens, we could see the pace of share buybacks pick up. But remember, no shareholder returns are guaranteed.
BAE Systems remains one of our preferred names in the defence sector, given its diverse portfolio and geographic footprint. The demand outlook is strong, and we think BAE's in good shape to deliver on its long-term growth strategy. Despite its recent rise in valuation, we still think there’s some upside on offer. But operational and supply chain challenges will have to be navigated carefully, and any missteps will likely be punished.
Environmental, social and governance (ESG) risk
The aerospace and defence sector is high-risk in terms of ESG. Product governance and business ethics are key risk drivers. Carbon emissions from products and services, data privacy and security and labour relations are also contributors to ESG risk.
According to Sustainalytics, BAE System’s management of ESG risk is strong.
It has a product safety policy and chain of accountability and assesses safety throughout product development. It has a board-level committee that oversees business ethics risks and has improved disclosure regarding human rights. However, disclosure regarding quality management standards and external certifications are lacking, and BAE should improve reporting on business ethics incident investigations. Employee development programmes are strong and the group has committed to net zero with interim targets in place.
BAE Systems key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.