BAE Systems plc (BA.) Ordinary 2.5p

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In a short update, BAE Systems confirmed that trading so far in the second half has been in line with group expectations.

The company has secured more than £27bn of orders so far in 2025, and further agreements are expected before year-end.

Recently upgraded full-year guidance was reiterated, with sales and underlying operating profits expected to grow by 8-10% and 9-11% respectively. Free cash flow guidance remains at more than £1.1bn (consensus: £1.5bn).

Around £1.5bn is expected to be returned to shareholders through dividends and share buybacks this year.

The shares were broadly flat in early trading.

Our view

BAE Systems has been performing well over the second half, helped by the elevated threat environment. Year-to-date orders have surpassed the £27bn mark, giving management the confidence to reiterate its recently upgraded guidance.

At its core, BAE Systems manufactures heavy-duty military equipment like fighter jets, aircraft and submarines. With NATO members recently 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 standing at a mammoth £75.4bn at the last count, just shy of record levels. 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 2.2%. 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.

Despite the rise in debt to help fund the Ball acquisition, we’re happy with the balance sheet. There’s plenty of free cash flow pumping around the business to manage these debt payments. However, it does mean we could see the rate of share buybacks slow in the near to medium term. 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. We still think there’s some upside on offer, despite its recent rise in valuation. 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.

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.

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