BAE Systems said it’s had a ‘strong operational and financial performance’ over the first four months of the year, with growing security threats leading governments to increase defence spending.
All full-year guidance was reiterated, with sales forecast to grow between 7-9% from 2025’s base of £30.7bn. Underlying operating profits are expected to outpace this, moving 9-11% higher from £3.3bn last year.
Free cash flow is expected to exceed £1.3bn (2025: 2.2bn).
The group has completed just over £0.9bn of its ongoing three-year £1.5bn share buyback programme, which started in July 2024.
The shares fell 3.2% in early trading.
Our view
BAE Systems confirmed it’s had a good start to 2026, and recent global events have prompted governments to increase defence spending. With continued order intake and a strong demand outlook, guidance for double-digit operating profit growth this year remains on track.
At its core, BAE Systems manufactures heavy-duty military equipment, including 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.
The recent US-Iran conflict has led the Trump administration to propose an eyewatering 50% increase in its defence budget to $1.5trn for 2027. While we think it’s unlikely that the full amount will be approved by Congress, anything north of $1.2trn would likely be seen as a positive for the defence sector.
Demand for the group’s products and services remains strong, with the order book rising to a record £83.6bn at the last count. Because these are typically long-cycle orders with revenues spread over several years, they give BAE multi-year revenue visibility.
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’s 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 remains strong, and despite the rise in valuation over recent years, 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
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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.
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