Rolls-Royce (LSE:RR.) shares are up a large 620% in three years, far outperforming all different UK shares. However whereas the corporate continues to carry out nicely, I actually don’t count on the share price to climb a lot additional.

The price-to-earnings (P/E) ratio has now risen above 23, nearly double that of the FTSE 100 common. Until earnings enhance drastically, I don’t count on that to drop quickly — limiting additional progress potential.

There’s no query that the aerospace engineer has loved a spectacular restoration underneath the management of CEO Tufan Erginbilgiç. Nevertheless, those that didn’t purchase in 2024 could have missed the boat. With that in thoughts, I feel there’s extra promising progress potential on this rival FTSE 100 inventory.

BAE Methods

Defence contractor BAE Methods (LSE: BA.) could lack the drama of Rolls-Royce’s turnaround, however it affords one thing simply as necessary: reliable, long-term progress backed by world demand and geopolitical necessity.

The corporate reported a document £37.7bn in new orders in 2023, lifting its complete order backlog to £69.8bn. That type of visibility offers it a serious benefit when planning for progress, funding, and shareholder returns. In distinction to Rolls-Royce, whose fortunes are intently tied to business aviation, BAE advantages from multi-year defence contracts backed by governments.

With ongoing world conflicts and elevated NATO spending, the macro atmosphere continues to favour defence shares. The UK, US and European nations are all boosting navy budgets, and BAE is commonly the supplier of option to help these wants. Latest wins embrace a serious position within the AUKUS submarine programme and continued funding in next-generation fighter jet techniques like Tempest.

Monetary energy and shareholder returns

From a valuation perspective, BAE trades at a ahead P/E of round 17, which seems cheap for an organization delivering regular double-digit earnings progress. It additionally has a wonderful monitor document of accelerating its dividend, with a compound annual progress charge of seven.3% over the previous 5 years. The present yield is round 2%, with share buybacks including additional help to complete returns.

Rolls-Royce, in contrast, solely simply reinstated its dividend and stays targeted on deleveraging. Whereas that will change within the coming years, BAE’s constant capital returns are already nicely established.

Concerns

BAE studies in sterling however earns a big portion of its earnings in {dollars}, which provides a threat of forex devaluation. Plus, this reliance on solely the UK and US governments creates focus threat. Whereas authorities contracts are normally secure and long-term, they are often delayed, renegotiated or cancelled resulting from shifting priorities or austerity measures.

Publicity to world markets additionally brings dangers tied to sanctions, commerce disputes and shifting defence relationships — significantly in areas just like the Center East or Asia-Pacific.

Development with out the hype

What I significantly like about BAE is that speculative restoration hopes don’t gas its progress story — it’s primarily based on stable fundamentals, long-term demand, and a transparent strategic roadmap. The agency is actively exploring rising applied sciences corresponding to cyber defence and AI-driven navy techniques, providing significant publicity to future-oriented sectors.

There’s no denying Rolls-Royce has delivered extraordinary returns for buyers who purchased on the proper time. However at at the moment’s valuation, the margin for error is slim. BAE Methods could not ship one other 600% surge however for long-term buyers searching for sustainable progress and a dedication to dividends, it might be the smarter choose to think about.