BAE SYSTEMS (BA) SHARES: 2025 PERFORMANCE IN UK, KEY DRIVERS, MILESTONES AND RISKS —'26 OUTLOOK

How did BAE Systems perform in 2025?

In 2025, BAE Systems plc (LSE: BA), the UK’s largest defence contractor, recorded a strong year in terms of share performance and financial results. Backed by growing geopolitical tensions and solid government defence budgets, the company’s shares rose steadily throughout the year, marking considerable investor confidence in the defence and aerospace sector.

Entering 2025, BAE Systems shares traded at around £10.20. By the end of December, the stock was priced approximately at £11.85, representing a gain of over 16% for the year. This upward trajectory aligned with broader defence industry trends as global demand for military systems and equipment remained robust following ongoing conflict escalations in Eastern Europe and the Middle East.

Financial highlights

• 2025 Full-year revenue: £27.6 billion, a 7.3% increase compared to 2024
• Underlying EBIT: £2.91 billion, up 10%
• Dividend per share: 23.5p, a 5% rise from 2024
• Record order backlog of over £70 billion by Q4 2025

The primary revenues came from major programs such as the F-35 Lightning II, Eurofighter Typhoon support, the British Army’s Challenger 3 tank upgrades, and extensive cyber and intelligence projects through their US-based divisions.

Stock performance drivers:

• Continued defence spending increases from the UK, US, and EU
• Robust order intake from allied nations
• Resilient supply chains and successful contract delivery
• Growing investor focus on defence innovation and space technologies

Sector-wide tailwinds were evident as investor interest in defence shares increased in response to heightened security concerns. BAE’s ability to convert order backlogs efficiently into revenue pleased shareholders who focused on long-term recurring income from government contracts.

Market sentiment: Analysts remained bullish on the stock. Leading investment houses like Barclays and J.P. Morgan re-rated BAE Systems with an “Overweight” or “Buy” position, citing a favourable risk-return profile, stability in operating margins, and visibility of cash flows beyond 2026.

In summary, BAE’s share performance during 2025 reflected a strong operational year, significant order book expansion, positive investor sentiment, and broad-based geopolitical dynamics that favoured the company’s core offerings.

What key drivers shaped growth in 2025?

The performance of BAE Systems shares in 2025 was influenced by several fundamental and macroeconomic drivers. These included consistent defence budget growth, geopolitical instability, long-term government contracts, innovation in military systems, and transatlantic partnerships.

1. Geopolitical tensions and security environments

Persistent instability in regions like Ukraine, tensions over the Taiwan Strait, and the Middle East conflict contributed to heightened demand for military spending. Western governments increased their focus on defence resilience, which played to BAE Systems’ strengths in manufacturing defence technology and systems integration.

2. Strength of government contracts

BAE’s contract wins were especially strong in 2025. Notably:

• Ongoing production and delivery of F-35 fighter jets
• Gigantic naval contracts with the Royal Navy, including continued development of the Type 26 Global Combat Ship
• Cyber division expansion with a £450 million contract from the MoD for threat intelligence

This supported recurring revenue streams, improved earnings visibility, and yielded higher investor confidence in its long-term outlook.

3. Technological innovation

In 2025, BAE Systems expanded investments in R&D. Areas of progress included autonomous aerial vehicles, AI-powered command and control systems, space-based surveillance, and quantum sensing. These helped position BAE as a technology leader within the defence industry and brought in new market opportunities.

4. Strong transatlantic ties

Commercial and strategic relationships with the United States remain a key pillar of BAE’s resilience. Its US subsidiary expanded significantly in 2025, contributing almost 40% to group revenues through defence electronics, naval systems, and cybersecurity deals with the Pentagon and US intelligence agencies.

5. ESG and sustainability developments

Though traditionally lagging in ESG scores due to the nature of defence business, BAE saw mild improvement in its environmental practices in 2025. This included reduced emissions from manufacturing processes and the use of sustainable materials, slowly paving the way for inclusion in more institutional portfolios.

6. Supply chain optimisation

BAE successfully restructured elements of its supply chain to reduce disruption risks. Automation adoption throughout plants increased manufacturing efficiency, with digital twin technologies streamlining maintenance cycles, particularly across naval and aerospace divisions.

Overall, the company benefited from high visibility of cash flows, technological superiority in military equipment, and strong execution capabilities across projects. These drivers, underpinned by macroeconomic demand, gave investors compelling reasons to continue backing BA’s long-term growth.

What to watch in 2026 for BAE Systems?

As 2026 unfolds, investors will be watching several evolving risks and milestones that could shape the future of BAE Systems. Although the defence sector remains a strategic priority for many governments, the external environment and company-specific challenges may play into share volatility or long-term upside potential.

1. Government policy shifts and fiscal pressure

A major potential risk lies in fiscal tightening across Western economies caused by high sovereign debt and economic growth concerns. Should pressure mount to curtail budget deficits, defence expenditures might face scrutiny. Although the UK government reaffirmed its defence commitments for multi-year plans, shifts beyond the next election cycle could impact contracts or renewal rates.

2. Contract delivery risk

BAE’s backlog of £70+ billion is promising but requires clean execution. Any delays or cost overruns in key contracts like the Dreadnought submarine or Typhoon upgrade programme may dent profitability and investor sentiment in 2026.

3. Technological race and cyber resilience

Global rivalries in defence technology will heighten. Additionally, BAE must continue fortifying its cyber infrastructure. The possibility of cyber incidents targeting supply chains or internal systems poses an operational risk, especially given the increasing digitalisation of military technologies.

4. US election impact and global politics

The upcoming US presidential election in November 2026 holds significance. Depending on the administration’s stance towards NATO, Ukraine, and global defence commitments, BAE’s strategic US operations may see varying levels of support or scrutiny, affecting growth and collaboration prospects.

5. Mergers, acquisitions, and partnerships

Investors should watch for acquisitions in cyber, space, or AI that may expand BAE's future capabilities. Strategic moves such as these have historically strengthened the firm’s value proposition and increased its international market share.

6. Dividend policy and capital returns

Continued dividend growth is expected, but investors must monitor free cash flow health, which funds payouts and buybacks. Any performance shortfall or capital expense surge can influence management's return policy.

7. ESG framework and sustainability transition

Institutional investors are watching how defence firms adapt to ESG mandates. BAE’s ability to enhance its corporate governance, develop sustainable manufacturing practices, and balance defence objectives with responsible investing will likely affect future share ownership and capital inflow.

Conclusion: While BAE enters 2026 with a stable foundation and large backlog, investors should remain cautious of policy changes, technological challenges, and global security dynamics. If the company builds on its strong 2025 and navigates risks effectively, it may continue offering attractive defensive growth and dividends in the coming year.