Britain’s defence industry continues to benefit from rising military spending, with governments investing billions to replenish weapons stockpiles, modernise armed forces and develop next-generation technology.
BAE Systems (LON:BA) upgraded its cash flow outlook, Rolls-Royce (LON:RR) is benefiting from demand across defence and aerospace, Chemring (LON:CHG) has a record order book, while QinetiQ’s (LON:QQ) latest results show double-digit profit growth and improving margins.
Investor relations
BAE Rolls-Royce Chemring Qinetiq
The bigger investment story is that defence spending is becoming a structural growth opportunity rather than simply a short-term response to geopolitical tensions. However, valuations, manufacturing capacity and the ability to convert orders into profits will increasingly determine which stocks outperform.
6 top global defence stocks for growth and income in 2026
1. BAE Systems: stronger cash flow and record order momentum
BAE Systems delivered an encouraging update, increasing its 2026 free cash flow guidance by 50% to approximately £3bn, from more than £2bn previously.
Management maintained its July guidance for sales growth of 8–10% and underlying operating profit growth of 10–12%, suggesting the cash flow upgrade is not necessarily a further improvement in profitability. Customer advances have also contributed to the stronger cash position.
BAE has secured approximately £33bn of orders so far in 2026, including £1.6bn associated with the Global Combat Air Programme and £4.3bn of funding for Britain’s next-generation nuclear deterrent submarines.
Chief executive Charles Woodburn said that, given ‘evolving threats’, BAE is ‘well positioned to deliver sustainable growth over the years ahead’.
What it means for investors: BAE offers exposure to major, long-duration defence programmes and provides considerable revenue visibility. However, investors should distinguish between stronger cash flow and underlying operating profit growth.
2. Rolls-Royce: defence, aerospace and AI infrastructure
Rolls-Royce reiterated its 2026 guidance for underlying operating profit of £4.7bn–£4.9bn and free cash flow of £3.8bn–£4bn.
Its defence division continues to benefit from demand for military engines and power systems, while the recovery in civil aerospace provides another earnings driver.
Power Systems is also benefiting from growing demand for electricity generation equipment, including from data centres. Order intake increased 62% during the first nine months, with its backlog reaching £8.6bn.
Chief executive Tufan Erginbilgic highlighted ‘strong operational, strategic and financial progress’.
The company also announced a further £1.5bn share buyback, to be completed by its February 2027 results.
What it means for investors: Rolls-Royce offers exposure to military modernisation, commercial aviation and AI-related electricity demand. However, defence is only part of the investment case, and substantial growth expectations are already reflected in its valuation.
3. Chemring: ammunition and counter-drone opportunities
Chemring is benefiting from demand to replenish ammunition stocks and increase defence manufacturing capacity.
Its order book reached a record £1.4bn at 31 October, while management expects 2026 underlying operating profit of approximately £79m.
Key contract opportunities include:
| Contract | Potential value |
| Energetics frameworks | Up to £100m |
| UK countermeasures framework | Up to £120m |
| Roke agreement | At least US$170m |
| Kongsberg order | £10m |
These agreements cover energetic materials, missile countermeasures and electronic warfare.
Chemring is expanding manufacturing capacity across the US, Scotland and Norway. However, restructuring at its Kilgore operation could result in an approximately £50m non-cash impairment and £3.5m of exceptional cash costs. Net debt is expected to reach around £145m.
What it means for investors: Chemring offers targeted exposure to the ammunition replenishment cycle and specialist defence technologies. Its record order book is encouraging, but investors need to see manufacturing investment translate into higher margins and sustainable cash generation.
4. QinetiQ: double-digit profit growth and strategic refocus
QinetiQ’s interim results provide encouraging evidence that higher defence spending is translating into improved profitability.
For the six months to 30 September 2026, underlying operating profit increased 14% to £110m, while operating margins expanded 120 basis points to 11.9%. Revenue rose 3% to £923m and underlying earnings per share increased 18% to 16.8%.
QinetiQ H1 FY27 results
| Financial measure | H1 FY27 | Change |
| Revenue | £923m | +3% |
| Order intake | £771m | +9% |
| Operating profit | £110m | +14% |
| Operating margin | 11.9% | +120bps |
| Underlying EPS | 16.8p | +18% |
| Interim dividend | 4.0p | +33% |
| Net debt | £274m | +51% |
The improvement in margins is particularly encouraging given relatively modest revenue growth, suggesting restructuring and efficiency initiatives are beginning to deliver results.
However, statutory operating profit was a loss of £79m, reflecting a £175m non-cash impairment relating to its US business. Net debt also increased to £274m.
The biggest strategic development is QinetiQ’s agreed sale of its US business to Serco for $292m, expected to complete in the first quarter of 2027. Management concluded the operation lacked the scale to deliver the growth and returns expected elsewhere in the group.
Chief executive Steve Wadey said the disposal ‘sharpens QinetiQ’s focus on the areas where we see the strongest opportunities for growth’.
Following the sale, approximately 70% of group revenue is expected to come from sole-source and long-term contracts, supported by a £4bn backlog and a five-year pipeline worth £12bn.
QinetiQ also intends to return a further £200m of disposal proceeds through additional £100m annual share buybacks in FY28 and FY29.
Full-year guidance remains unchanged, with revenue growth of 3–5%, operating margins of 11–11.5% and EPS growth of 8–10%.
What it means for investors: QinetiQ is becoming a more focused defence technology and engineering business. Improving margins, long-term contracts and additional shareholder returns are encouraging, although completing the US disposal, reducing debt and accelerating organic growth remain important tests.
5. What does this mean for defence investors?
The four companies offer different ways to invest in rising military expenditure.
| Company | Investment opportunity | Latest signal |
| BAE Systems | Major defence programmes | £33bn orders; £3bn cash flow guidance |
| Rolls-Royce | Defence, aerospace and power systems | £4.7bn–£4.9bn profit guidance |
| Chemring | Munitions and countermeasures | Record £1.4bn order book |
| QinetiQ | Defence technology and engineering | 14% underlying profit growth |
Three themes stand out.
First, defence spending is becoming structural. The war in Ukraine, Middle East tensions and growing geopolitical competition are encouraging governments to increase military expenditure. This creates a multi-year opportunity across ammunition, air defence, combat aircraft, naval systems and military technology.
Second, manufacturing capacity matters. Winning contracts is only part of the equation. Companies must demonstrate they can deliver equipment at scale, manage supply chains and protect margins.
Third, order books do not guarantee shareholder returns. Contract delays, inflation, working capital requirements and cost overruns can all undermine profitability. Investors should monitor margins, cash conversion and returns on capital alongside order growth.
Sharesify investor verdict
Britain’s defence industry remains an attractive long-term investment theme, but stock selection matters.
Arguably, BAE Systems stands out for its scale and major programme pipeline. Rolls-Royce offers broader exposure to defence, aviation and AI infrastructure. Chemring provides a more specialised opportunity in ammunition and countermeasures, while QinetiQ offers exposure to defence technology, testing and engineering.
Importantly, the opportunity extends beyond traditional weapons manufacturers into electronic warfare, cyber security, autonomous systems and counter-drone technology.
However, investors should avoid chasing shares simply because defence budgets are rising. Valuations, contract execution and procurement delays could all create volatility.
The key question is no longer simply how much governments will spend, but which companies can convert that spending into sustained earnings growth, strong cash flow and attractive shareholder returns.
You might also like:
