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BAE Systems‘ (LSE: BA) share price did brilliantly in 2025, yet it was overshadowed by a rival FTSE 100 weapons maker that did even better.
For years, BAE Systems has been the go-to stock for investors seeking exposure to the defence sector, where it’s the UK’s biggest operator. Rolls-Royce interests many, but it has large non-defence divisions as well.
Babcock International Group (LSE: BAB) gives investors another FTSE 100 defence player to back, with its shares taking off like a rocket lately. So can BAE Systems and Babcock continue to shoot the lights out in 2026?
FTSE 100’s top-performing sector
BAE Systems remains the much bigger operator. Its £50bn market-cap compares to Babcock’s £6bn, but the latter’s growing at speed.
Both have benefitted from the same trigger, as the West wakes up to the threat from Russia and China, and Europe realises it can’t hide behind the US security umbrella any longer.
BAE Systems and Babcok now boast massive order books, giving production and revenue visibility for years. BAE Systems has a thumping £78.3bn backlog, while Babcock’s stands at £9.9bn.
Governments don’t cancel defence contracts lightly, and rising military budgets across Europe and the US give both companies years of guaranteed work. For BAE Systems, that spans fighter jets, submarines, warships, munitions and cyber security, with heavy exposure to the US as well as the UK.
Babcock focuses on maintaining, refitting and supporting submarines, naval fleets and nuclear infrastructure. That’s long-term work, which makes revenues more resilient.
Huge total return
There are risks of course. Defence projects are complex and delays or cost overruns can hit margins, especially on fixed-price contracts. Political winds can shift and any peace deal in Ukraine, even a partial or unsatisfactory settlement, could cool investor enthusiasm and send shares into a tailspin. Some might see that as the ideal time to buy them.
Both BAE Systems and Babcock are expensive after their strong run, with price-to-earnings ratios around 25. That compares to the FTSE 100 average of 17. Those valuations aren’t outrageous, but do leave less room for error.
Long-term investors will be thrilled with their performance in 2025. BAE Systems shares climbed 47.7%. Add in the trading yield of 1.9%, and the total return is 49.6%. That would have turned £10,000 into £14,960.
Babcock investors would have been ecstatic. Its shares are up 152.3% in 2025, plus a modest trailing yield of 0.5%. That would have transformed £10k into an eye-poppoing £25,280. Together, they show the power of picking individual shares rather than tracking the market, though such returns can’t be relied on every year.
Despite their incredible run, I think both are worth considering for investors looking to balance a portfolio with defence exposure. But they must take a long-term view. After such a strong run, gains may be harder to come by, and will depend on geopolitical factors beyond their control. But in a world that’s unlikely to disarm, both BAE Systems and Babcock are likely to remain key portfolio holdings for years to come.
