ii view: BAE Systems to benefit from boom in demand

Full-year results to 31 December

• Sales up 14% to £28.3 billion
• Adjusted profit (EBIT) up 14% to £3 billion
• Final dividend of 20.6p per share
• Total dividend for the year up 10% to 33p per share
• Net debt up £3.9 billion to £4.9 billion

Guidance:

• Expects year ahead 2025 revenues to growth between 7% and 9%
• Expects adjusted profit (EBIT) to growth between 9% and 10%

Chief executive Charles Woodburn said: 

"We're supporting our customers around the world, while shaping our portfolio towards higher growth and strategically important markets. 

"Based on the exceptional visibility of our record order backlog and sustainability of our value-compounding business model, we remain confident in the positive momentum of our business into the future."

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ii round-up:

BAE Systems (LSE:BA.) today detailed soaring annual profits, with the defence equipment maker predicting a further gain in adjusted profits for 2025. 

Sales for the year to 31 December 2024 rose 14% to £28.3 billion, driving adjusted profit (EBIT) up by the same amount to £3 billion. Order intake reduced to £33.7 billion from £37.7 billion in 2023, although an 11% increase in the order book to a record £77.8 billion supports an expected 10% gain in 2025 profit.  

Shares in the FTSE 100 company rose 0.5% in UK trading having come into this latest news up 16% year-to-date. That’s below a 29% gain for fellow UK defence contractor Babcock International Group (LSE:BAB), although comfortably ahead of a 5% improvement for the FTSE 100 index itself so far in 2025. 

BAE Systems makes an array of equipment from submarines to jet fighter components and armoured vehicles. These latest results come against a backdrop of concerns for required increased European defence spending to combat the threat from Russia, and given Donald Trump’s desire to cut military spending. 

A final dividend of 20.6p per share and payable on 2 June to eligible shareholders, leaves the total dividend for the year up 10% at 33p per share. 

Group net debt climbed £3.9 billion from a year ago to £4.9 billion, driven higher by acquisitions and including its previous £4.4 billion purchase of US company Ball Aerospace that widened its product portfolio into the space sector.

BAE expects revenue for the 2025 year ahead to grow by between 7% and 9%, helping boost profit by between 9% and 10%. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on BAE post the news, raising its estimate of fair value to 1,685p from 1,611p.

ii view:

Employing around 107,000 people in more than 40 countries, BAE competes against global rivals such as Lockheed Martin Corp (NYSE:LMT) and Northrop Grumman Corp (NYSE:NOC). Electronic systems including night vision equipment generated its biggest slug of profit during this latest financial year at 31%. That was followed by aircraft related profits at 30%, maritime equipment at 15%, platforms & services including vehicles and ammunition at 14%, and cyber & Intelligence products the balance. Geographically, the US proved its largest market at 44% of sales. The UK came in at 26%, with other big customers Saudi Arabia at 10% and Australia at 4%. 

For investors, ethical concerns about the manufacture of weapons may deter some investors from buying BAE shares. Changes of government can come with future budget implications, with the US now under Donald Trump potentially reviewing defence spending. Acquisitions, including its purchase of Ball Aerospace, are not without risk, while a forecast price/earnings (PE) ratio above the three- and 10-year averages may suggest the shares are not obviously cheap. 

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To the upside, Russia’s invasion of Ukraine has raised concern about possible future military action. China’s positioning with Russia and additional tensions regarding Taiwan warrant consideration. Diversity of both product and geographical region exists. The purchase of Ball Aerospace has widened its product portfolio into the space sector, while the dividend payment has risen for more than 18 years consecutively, leaving the shares on a forecast yield of around 2.4%. 

For now, and despite continued risks, this major defence contractor looks to remain worthy of a place in many already diversified investor portfolios. 

Positives: 

• Diversity of products and geographical sales
• Progressive dividend policy

Negatives:

• Arms manufacturing may generate ethical concerns
• Subject to government finances

The average rating of stock market analysts:

Buy