Shares of British defense contractor BAE Systems experienced a significant rally in early London trading on Wednesday, climbing over 6% following the release of its annual financial results and an optimistic outlook for the coming year. The stock's ascent brought it near its 52-week high, reflecting strong investor confidence in the company's performance and strategic direction.
Financial Performance Highlights
The company reported a 10% increase in sales for the 2025 fiscal year, reaching £30.662 billion. Underlying earnings before interest and taxes (EBIT), a key profitability metric for the firm, rose by 12% to £3.322 billion. However, free cash flow saw a decline, dropping to £2.158 billion from £2.505 billion in the prior year. This metric is closely watched by analysts for insights into the company's financial health and capital allocation flexibility.
A standout figure from the report was the order backlog, which swelled to a historic £83.6 billion, up from the previously reported £83.6 billion. This backlog, fueled by £36.8 billion in new orders received during the year, effectively secures revenue visibility for several years ahead. The company also provided guidance for 2026, projecting sales growth between 7% and 9% and an increase in underlying EBIT of 9% to 11%.
Shareholder Returns and Capital Management
In a move welcomed by investors, BAE Systems announced a 10% increase in its full-year dividend to 36.3 pence per share. Concurrently, the company executed a share repurchase program, buying back 30 million shares at a total cost of £502 million. A separate filing revealed an additional purchase of 105,814 shares on February 16 at a volume-weighted average price of 2,022.50 pence each, as part of an ongoing buyback initiative. These repurchased shares are slated for cancellation.
The board confirmed key dividend dates, setting April 23 as the ex-dividend date for the final payout, with a record date of April 24. Shareholders are scheduled to receive payment on June 4. Looking forward, the interim dividend is expected to have an ex-dividend date around October 22, with payment on December 2. The company's half-year results are anticipated on July 30.
Leadership and Market Context
Chief Executive Charles Woodburn expressed confidence in the company's trajectory, stating the firm is well-positioned to deliver sustained growth in the coming years. The results come amid a period of elevated defense spending across Europe, a trend that has accelerated following geopolitical tensions. BAE Systems' stock has more than tripled since early 2022 and had gained an additional 18% in the current year prior to Wednesday's session, pushing its market valuation close to £60 billion.
The company also announced boardroom changes. Non-executive director Stephen Pearce will step down as chair of the audit and risk committee at the annual general meeting on May 7 and plans to retire at the end of November. Chair Cressida Hogg indicated that Angus Cockburn is set to assume the committee role, describing him as a valuable addition to the board's oversight functions.
Upcoming Presentation and Analyst Focus
Investor attention now turns to a scheduled analyst and investor presentation at 09:30 GMT, which will include a live question-and-answer session. Market participants are keenly awaiting further details on cash conversion rates, margin trends, and commentary on whether the robust pace of new orders is likely to continue outpacing deliveries in the next quarter.
While the results are strong, the sector is not without its risks. Defense contractors often face volatility in cash flows, which are tied to project milestones and the timing of customer payments. Large, complex contracts can experience unexpected delays or pauses, even if reported earnings remain stable. Additionally, currency fluctuations pose a risk; a strengthening British pound can diminish the value of overseas earnings when converted back to sterling.
The broader European defense sector continues to benefit from increased government budgetary allocations, with investor focus firmly fixed on order pipelines and capital return policies. BAE Systems' latest report underscores its leading position within this favorable market environment.
