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Why BAE Systems and Babcock Are Outperforming Amid Global Geopolitical Tensions
BAE Systems and Babcock Surge – Shares in UK defence giants BAE Systems (LSE: BA) and Babcock International (LSE: BAB) are hitting new heights, leaving broader markets behind. Over the past month, BAE has risen 14.6%, while Babcock has surged 18.8%, compared to just 1.18% growth across the FTSE 100. The sector’s meteoric rise underscores how geopolitical tensions are reshaping investment landscapes.
Geopolitical Drivers Fuel Defence Stocks
Over the past year, BAE shares have gained 50%, and Babcock an astonishing 143%. Analysts point to clear catalysts: Russia’s invasion of Ukraine, escalating tensions in the Middle East, and concerns over China. As Western governments ramp up defence spending, companies like BAE and Babcock are directly benefiting from these geopolitical headwinds.
“The so-called peace dividend is gone,” said a market observer. Governments are increasingly prioritizing military readiness, and defence contractors are reaping the rewards.
Impressive Financial Performance
BAE’s Q1 results, released on 30 July, revealed sales up 11% to £14.6bn, with full-year guidance increased. Although order intake dipped slightly, the backlog remains massive at £75.4bn, reflecting robust demand.
Babcock, meanwhile, reported revenue growth of 10% to £4.83bn and an operating profit surge to £362.9m for the full year ending 25 June. Its contract backlog stands at £10.4bn, and the board approved a £200m share buyback, signaling confidence in a “new era for defence.”
Further bolstering the sector, Norway pledged £10bn for UK-built warships on 1 September, with Denmark and Sweden expected to follow. Babcock, producing the Type-31 frigates, stands to benefit directly from this renewed demand. With hopes of a quick peace deal in Ukraine fading, the order books are likely to continue expanding.
Potential Risks Remain
Despite strong momentum, investors should remain cautious. European governments face fiscal constraints that could impact long-term commitments. Valuations are also elevated: BAE trades at a P/E of 28.4, while Babcock sits at 22.5. This leaves limited room for disappointment if growth slows.
Cost overruns are another factor. Babcock has already taken a £90m provision on a Royal Navy contract, highlighting the complexity and risk associated with defence projects.
Long-Term Growth and Dividends
Long-term returns for investors have been spectacular. Since September 2020, BAE shares have soared ~290%, turning a £10,000 investment into £39,000. Babcock has performed even better, up 390%, transforming the same stake into £49,000. Dividends have further sweetened returns, with BAE’s trailing yield at 1.5% and Babcock’s yield gradually increasing after previous cuts.
BAE has consistently raised payouts by over 5% per year on average for the past decade, while Babcock restored its dividend to 5p in 2024 and increased it by 30% to 6.5p this year.
The defence sector’s momentum shows no signs of slowing. With key markets estimated at $1.75trn annually, BAE and Babcock are well-positioned to capture long-term growth. Rising geopolitical tensions, strong order backlogs, and institutional confidence all contribute to a compelling narrative for the UK defence industry.
Investors should watch closely as these companies navigate high valuations, cost risks, and continued geopolitical uncertainty. The combination of explosive growth and strategic positioning in global defence markets makes BAE and Babcock two of the FTSE 100’s standout performers.
