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BAE Systems‘ (LSE:BA.) share price has been one of the FTSE 100‘s star performers in recent years. With dividends added to the mix, investors in the FTSE 100 company have enjoyed brilliant returns. The question is, can it last?
During the past 12 months, BAE Systems shares have risen 57% in value. With a 1.7% trailing yield providing an added sweetener, the total return improves to 58.7%. That’s approaching three times what the broader FTSE index has averaged, and would have turned a £10,000 investment into £15,870 today.
Driven by soaring defence budgets and strong operational execution, BAE’s profits have soared over the past four years, driving its share price higher. Given the highly volatile and uncertain geopolitical landscape, I think it’s likely that earnings will continue to soar.
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However, this doesn’t necessarily mean BAE’s shares will keep on climbing. How much of the company’s expected earnings growth is reflected in today’s valuation? And could it limit the potential for further price gains?
It’s clear the shares now trade at an enormous premium to their long-term average. At £19.30 per share, the stock’s forward price-to-earnings (P/E) ratio is 23 times. That’s miles above the 10-year average of 14 times.
On the other hand, the UK company still looks cheap compared with its continental peers. The broader European defence sector commands a forward P/E ratio of 32-33. Still, that’s not to say BAE is immune to a potential pullback, for instance if supply chain problems worsen or the business loses out on key contracts to its rivals.
What do analysts think?
City analysts are largely confident, though, that BAE Systems shares will keep on surging. Seventeen analysts currently have ratings on the FTSE 100 stock. Their average share price target is £21.22, which would be a 10.4% increase from current levels.
That’s not all. Dividends are also expected to continue rising over the short-to-medium term, leaving a 2.1% dividend yield for 2026. If forecasts are correct, a £10,000 investment today will turn into £11,250 a year from now, based on a total return of 12.5%.
That’s a pretty healthy return, even if below the one we’ve seen in recent times. The question is…
Are BAE Systems shares a Buy?
BAE’s surging share price reflects the rupturing geopolitical landscape that’s powering defence budgets. The FTSE 100 company has the scale and the expertise across markets to meet rising arms demand — it’s tipped underlying earnings growth of 9% to 11% for 2025, results for which are due 18 February.
However, if worries over a changing global order ease, the investment case for BAE Systems shares will change significantly. But is this likely? Concerns in Europe over Russian expansionism remain at fever pitch, as uncertainty over Chinese foreign policy still lingers in the background.
In fact, broader tensions have worsened in 2026 after the US touted a possible military takeover of Greenland. This could provide an extra boost to UK defence companies if European nations shun US contractors for those closer to home.
BAE shares might be expensive, but I believe the company fully deserves its premium valuation. I think it’s one of the hottest growth stocks to consider right now.
