Is BAE Systems the Best FTSE 100 Dividend Stock for 2025?

Can BAE Systems Keep Its Dividend Growth on Track Amid Market Volatility?

BAE Systems (LSE:BA.), a major player in the defence sector, is widely regarded as a reliable dividend stock for long-term investors. The FTSE 100 company has increased its annual dividend consistently since 2012, reflecting its strong market position and the stable nature of defence spending. While the broader economy can fluctuate, demand for defence products such as weaponry and related hardware remains resilient. With a solid foundation and the consistent growth of its dividends, BAE offers promising prospects for investors seeking stable income from dividend stocks.

Outlook for Continued Dividend Growth

BAE Systems is poised for continued dividend growth, with City analysts projecting steady increases in the coming years. According to analysts, dividends are expected to rise through 2026, underpinned by the company’s solid financial position and an optimistic outlook for the defence industry. The table below (not shown) highlights these expected increases, which are well-supported by anticipated earnings. Even if the company faces challenges, such as supply chain disruptions or project delivery issues, BAE is projected to maintain its payout growth trajectory.

Solid Dividend Cover

One of the key aspects of BAE’s strong financial health is its robust dividend cover, which rings in at 2.1 times for the next two years. This is higher than the widely regarded minimum level of 2 times that investors typically seek. This level of cover provides BAE with the flexibility to maintain dividend payments while also investing for future growth. For investors looking for a dependable income stream, this high dividend cover signals that the company is in a strong position to meet its payout forecasts.

Continued Sales and Profit Growth

In 2024, BAE Systems saw significant growth in both sales and operating profit. Sales rose by 14%, reaching £26.3 billion, while operating profit increased by 4%, totalling £2.7 billion. This growth was largely driven by a strong order book, which saw an £8 billion increase in its backlog, bringing the total to £77.8 billion. With such a large order backlog, BAE is in a strong position to maintain its earnings visibility and continue delivering solid results in the years ahead.

Strong Financial Resources and Cash Flow

BAE’s financial resources further strengthen its outlook for dividend growth. The company’s free cash flow remains robust, having reached an impressive £2.5 billion in 2025, boosted by strong customer advances and excellent operational cash conversion. Additionally, BAE Systems has a £1.5 billion share buyback programme scheduled for completion in 2026, which underscores the strength of its balance sheet. The company’s financial resources give it the flexibility to grow dividends in line with expectations while maintaining strong operational performance.

Impact of Share Price on Dividend Yield

Despite the company’s strong performance and outlook, BAE Systems’ soaring share price has caused its forward dividend yields to dip slightly. For the next two years, the company’s dividend yields are below the FTSE 100 average of 3.5%. While this may deter some investors, the potential for rapid, inflation-beating dividend growth in the long term remains a key factor for investors seeking passive income. Even with the lower dividend yield, the company’s strong fundamentals and solid outlook for continued growth make BAE Systems a noteworthy stock to watch for those seeking long-term value.

Conclusion: BAE Systems’ Position in the Market

BAE Systems stands out as a resilient dividend stock with consistent growth in payouts, supported by strong financial resources and a favourable outlook for the defence sector. The company’s robust dividend cover and significant order backlog position it well for continued dividend increases. While its forward dividend yield may be below the FTSE 100 average in the short term, the potential for strong, inflation-beating growth in the years ahead makes BAE Systems an attractive option for investors interested in passive income. As the global demand for defence products remains stable, BAE’s market-leading position ensures it will likely continue to deliver value to its shareholders.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Cryptocurrencies and stocks, particularly in micro-cap companies, are subject to significant volatility and risk. Please conduct thorough research before making any investment decisions.