BAE Systems’ full-year sales rose 14% to £28.3bn, ignoring exchange rate impacts. Performance was helped by the integration of the new Space & Missions Systems business (formerly Ball Aerospace), and all divisions delivering growth.
Underlying operating profit also moved 14% higher to £3.0bn, at the top end of the group’s guidance range. The order book grew by £8.0bn to a record £77.8bn.
Despite falling by £0.1bn to £2.5bn, free cash flow was well ahead of guidance due to early receipt of payments from customers. Net debt rose from £2.4bn to £6.8bn as a result of debt being raised to help fund the Ball Aerospace acquisition.
In 2025, sales and underlying operating profits are expected to grow between 7-9% and 8-10% respectively.
A final dividend of 20.6p takes the full-year total to 33.0p, up 10%.
The shares were broadly flat in early trading.
Our view
BAE Systems delivered a strong set of full-year results, with the integration of the Space & Missions Systems business (formerly Ball Aerospace) contributing positively to performance. All business divisions were in growth territory, helping both sales and profits rise at double-digit rates.
At its core, BAE Systems manufactures heavy-duty military equipment like fighter jets, aircraft and submarines. While global tensions remain elevated, many governments are expected to keep raising their defence budgets over the coming years, and BAE looks well-placed to capture some of this extra spending.
Despite being a UK-based company, nearly 50% 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.
Demand for the group’s products and services remains strong, helping to push the order book up to a record £77.8bn. 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 2.7%. Please remember no dividend is ever guaranteed.
But keep in mind that profitability hinges on an 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. BAE has a strong demand outlook and 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 is 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.
Despite its valuation being well above the long-run average, it’s not demanding when compared to BAE’s US peers. Operational and supply chain challenges will have to be navigated carefully though, so some ups and downs along the way can’t be ruled out.
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
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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