Defense stocks have long been the bastions of the diversified investor. For the few key players in the defense sector, large contracts with a reliable debtor in the government are on offer. As such, this facilitates investment in new technologies and creates lasting business intangibles.
Of the few defense companies that pass the government clearance required to ensure the walling of security know-how within borders, rich contracts are on offer. Here we will look at some of the key players that are charged with keeping nations ahead of the competition and the borders secure.
While defense budgets were slashed during the pandemic to make way for other social programs, under heightened geopolitical tensions, defense is back in the spotlight.
European stocks in the sector are outperforming U.S counterparts on a YTD basis, and with NATO nations committing to increasing their spend on defense to 5% over the coming years, this is a momentum play that has serious staying power. How much of the future growth is priced in is open to question, but the trend is in tact.
BAE Systems (LON:BA): The Defensive Stalwart
At a current stock price of 1,891p, BAE Systems shares offers a more conservative investment profile. Its one-year return of approximately +50% reflects strong growth, but with a lower multiple, and underpinned by a consistent order backlog and robust cash flow.
With a market capitalization of around £56 billion and a P/E ratio of 29, BAE Systems is the most reasonably valued among the three. Its dividend yield of approximately 2% provides a steady income stream, making it attractive to income-seeking investors. BAE Systems has demonstrably benefited from increased defence spending within Europe and NATO, particularly with the ongoing geopolitical instability in Eastern Europe and elsewhere.
The company’s defensive nature makes it a relatively stable investment, particularly appealing to those seeking lower volatility and consistent dividend growth. BAE shares have only just come down from highs, yet this could well be a pullback before a continuation play.
Rolls-Royce Holdings (LON:RR)
Rolls-Royce shares, currently trading above 1,000 for the first time, has been a standout performer, delivering an impressive one-year return of +123%. The company’s market capitalization is larger than that of BAE Systems, at roughly £84.5 billion, but its P/E ratio of 34 indicates a higher valuation.
The company’s remarkable recovery is attributed to the resurgence in civil aerospace, coupled with strong performance in its defense and power systems divisions. Rolls-Royce has successfully reinstated financial guidance after a period of pandemic-induced volatility, signaling a return to stability and growth. While leverage remains higher than its peers, recent results indicate improving margins and enhanced cash flow generation.
The company has been boosted by positive comments from NATO Secretary-General Mark Rutte regarding defence spending targets. Analysts have been quick to raise targets, as sentiment continues to build despite the run up.
Rheinmetall AG (ETR:RHM): The High-Growth Contender
Rheinmetall, priced at €1840, boasts the highest one-year return of the three, at +280%. Its market capitalization is catching up fast, as defense spending grows in Germany, with the current value of €82 billion.
The company’s surge in value is directly linked to soaring European defense budgets, driven by geopolitical concerns. Rheinmetall has witnessed record order intake, particularly in armored vehicles and ammunition. Its diversification across both defense and automotive sectors provides some resilience, although its growth is overwhelmingly propelled by defense contracts.
Rheinmetall is considered an aggressive growth play, trading at a premium valuation but supported by strong earnings momentum. The company’s strategic partnership with India’s Reliance Defence, announced in May 2025, further expands its global footprint and future growth opportunities in the ammunition sector.
Comparative Analysis
Investment Considerations
Investors should carefully consider their risk tolerance and investment objectives when choosing between these three stocks. BAE Systems is the most defensive option, offering stability and a higher dividend yield.
Rheinmetall is the highest-growth play, but its valuation reflects this potential and makes it more vulnerable to fluctuations in defense spending.
The EU-UK trade deal signed in May 2025, which included a defence and security pact, has further bolstered investor confidence in these European companies, particularly Rolls-Royce and BAE Systems. All three companies have experienced substantial gains over the past year, reflecting the broader investor sentiment towards the European defence sector amid elevated geopolitical risks.
The recent surge in European defence stocks shows no immediate signs of slowing down, making these companies potentially attractive investments for those willing to navigate the inherent risks.
Final Thoughts
Defense companies are those that have been thoroughly vetted for government spending, have trusted and secure technological capabilities, and engineer the security of our nations.
With the assets of defense companies too critical to national security to leave idle, steadily growing revenue streams are secured, ensuring a steady appreciation in the value of any investment over time.
There are a number of defense companies, and therefore defense stocks, to choose from outside of those listed above, which may be better tailored to your investment strategy. In any case, an element of research and analysis is always highly recommended.
Asktraders has a wealth of quantitative and qualitative tools at your disposal. Traders are advised to perform due diligence before making any investment and keep up to date with the latest trends and market moves by following our detailed analysis.
As always, thorough due diligence and an understanding of individual investment goals are crucial before making any investment decisions. Investors should monitor geopolitical developments, defense budget allocations, and company-specific news to stay informed and adapt their strategies accordingly.
