The BAE Methods (LSE: BA.) share price rocketed 17% increased at this time (3 March) to achieve 1,642p. The entire European defence sector is surging, together with Rolls-Royce inventory, which rose 6% and neared 800p!

BAE is now up 30% in 2025, rating it among the many FTSE 100‘s best-performing shares year to date. Here’s why it’s flying increased.

Paradigm shift

On 28 February, President Donald Trump met with Ukrainian President Volodymyr Zelenskyy on the White Home to debate a minerals deal and an finish to the warfare with Russia. To say it didn’t go properly can be an understatement. 

Following this, Trump supporter Elon Musk even publicly expressed assist for US withdrawal from NATO. For sure, all this has profound ramifications for European safety.

On the Ukraine defence summit hosted by Keir Starmer over the weekend, NATO and European leaders agreed to bolster defence assist for Ukraine and emphasised the pressing want for Europe to rearm. European Fee President Ursula von der Leyen explicitly acknowledged that budgetary guidelines might be tailored to make that occur.

In the meantime, a Reuters report says that the incoming German authorities is contemplating a defence fund. That is fairly the turnaround. Famously below von der Leyen’s tenure as Germany’s Defence Minister, studies emerged of German troopers utilizing broomsticks as an alternative of machine weapons throughout NATO workout routines as a result of extreme tools shortages.

BAE chief govt Charles Woodburn lately referred to as this a “paradigm shift“. I don’t see that remark as exaggerated.

For European defence companies like BAE, tens of billions of kilos and euros price of contracts will probably be up for grabs.

Stable development

Final yr, the corporate reported gross sales of £28.3bn, with the order backlog rising 11% to a report £77.8bn. For 2025, it expects gross sales to extend by 7%-9% and underlying earnings per share to rise 8%-10%.

However that steering was earlier than final week’s occasions. Buyers are most likely anticipating a double-digit rise in income and earnings now.

As for the dividend, that was hiked 10% final yr, and analysts count on a 9% enhance this yr, then 10% in 2026. Whereas no dividend is assured, the possible payouts are coated greater than twice by forecast earnings.

Nevertheless, following the robust share price rally, the ahead yield is barely round 2.2%.

What may go improper?

Whereas Europe is dealing with up to the truth of rearming, the US is seeking to lower its navy finances. In order that might be a threat to BAE’s order development, particularly as America is at present its largest market.

Additionally, Saudi Arabia is a significant purchaser of BAE tools (similar to Hurricane fighter jets). Nevertheless, it has strengthened defence ties with China and Russia. If Saudi Arabia shifts away from Western suppliers, BAE’s income from the area may decline.

Ought to I purchase the shares?

All of us need peace in Ukraine. However sadly, that gained’t change the truth that the US-led worldwide rules-based order — constructed on worldwide legislation and multilateral establishments following World Battle II — seems to be collapsing. Two fast penalties of this are rising instability and better navy spending.

I invested in BAE inventory in 2022 at 819p, then once more at 1,158p simply earlier than Christmas. However it’s now buying and selling at round 24 occasions earnings, which I believe is kind of excessive. Due to this fact, I’ll watch for dips earlier than I take into account shopping for extra shares.