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FTSE 100 shares BAE Systems again Babcock International it has been on fire for the last few years and it is possible that the Prime Minister is about to do something that means this continues.
First some context. Both have been ranked among Footsie’s top five players for the past five years, once Rolls-Royce, Airtel Africa again Fresnillo.
Here are the returns from this impressive quintet of UK stocks.
| Five-year returns (excluding dividends) | |
|---|---|
| Rolls-Royce | 1,219% |
| Babcock International | 471% |
| Airtel Africa | 321% |
| BAE Systems | 315% |
| Fresnillo | 274% |
A common theme in all three of these is that they are in the aerospace and defense sectors. BAE Systems is an industry giant and Babcock operates the UK’s nuclear submarine bases. Meanwhile, Rolls-Royce has a successful defense division.
All three stocks gained strength today (16 February), with Babcock jumping nearly 4%. Shareholders can appreciate the news about the prime minister, Keir Starmer.
Spend more, faster
According to the BBCPrime Minister Starmer is considering increasing defense spending faster than expected. The government had initially announced plans to spend 2.5% of gross domestic product (GDP) on defense by 2027. This will rise to 3% in the next parliament.
However, the BBC reports that this 3% may be met by the end of this parliament (scheduled for 2029). Bringing this forward will cost billions of pounds.
At the Munich Security Conference at the weekend, the Prime Minister said: “To meet the broader threat, it is clear that we will need to spend more money, quickly.”
Needless to say, spending money quickly would benefit Babcock, which has a much higher sales figure tied to the Ministry of Defense than BAE. But this will benefit everyone, including Melrose Industrieswhich owns GKN Aerospace and supplies military airframes and engines.
Of course, there is a risk that these stocks will go back if the UK government does not release the money for this additional defensive lashing. But if we look at the prices their shares are going up today, the market clearly thinks that they can gain more.
- Babcock +3.8%
- Melrose +3.8%
- BAE +3.1%
- Rolls-Royce +1.5%
An AIM-listed gem
Before ending, I want to highlight another defense-related stock that should benefit from a higher military budget. That one Filtronic (LSE:FTC), small CHECKThe listed share rose 3.2% today.
The company designs and manufactures communications systems used in a variety of industries, including telecommunications (5G), defense, and space. For example, it provides radio frequency (RF) solutions for radar and electronic warfare systems.
But it’s the satellite communications systems that have put the rocket booster below the stock price. In particular, it is a partner of SpaceX, with which it has signed a number of contracts, including one worth $62.5m last year. This is to provide components of the rapidly expanding Starlink satellite internet service.
Revenue increased from £16.3m in FY23 to £56.3m in FY25 (ended May). Growth is expected to slow this year due to the timing of SpaceX orders, but Filtronic has a record order book and its next-generation GaN amplifier plans are set to “a key driver of growth over the next three to five years“.
One thing to note here is that SpaceX captured 83% of revenue last year, so there is a high risk of customer churn. However, the company is diversifying its customer base, with major contracts being won with European/defense contractors. Higher, faster spending should provide more momentum.
Naturally, some investors have ethical issues with hedge-related stocks. But for those who don’t, I think Filtronic is worth buying for the next five years.
