Long-term investors in BAE Systems (LSE: BA.) shares are likely to be sitting on some pretty juicy profits today.

The shares are up around 250% in five years, with dividends on top. The trailing yield may only be around 1.85%, but BAE has an excellent record of increasing shareholder payouts, raising them every year but one this millennium (the exception was way back in 2003). Its dividend has grown at an annualised 9.33% over the last five years.

Much of this superb performance has been driven by geopolitics, particularly Russia’s invasion of Ukraine. The West has realised that the peace dividend is over and it has to get serious about rearmament again.

Massive order backlog

BAE is a huge beneficiary because it makes everything from submarines and warships to combat aircraft, missiles, electronic warfare systems and military technology. In July, the UK Government awarded it another £5.9bn contract for the Dreadnought nuclear deterrent submarines.

Its order backlog hit a record £84bn at the end of June. That’s an extraordinary amount of future work booked, giving investors first-class earnings visibility. But it’s also at the mercy of supply chain bottlenecks, customer disputes and potential execution risk. Material cost inflation could also squeeze profit margins on fixed-price contracts. 

First-half sales rose 9% to £15.8bn and underlying operating profit jumped 11% to £1.7bn. BAE even upgraded its full-year guidance.

But what’s this? Despite rising defence spending and geopolitical tensions, BAE shares have actually fallen around 3.5% over the last year. They’ve slipped sharply from their March peak of 2,360p.

This FTSE 100 stock is pricey

One obvious reason is valuation. At around 1,962p, the shares trade at roughly 26 times earnings. That’s a hefty rating even for a company as impressive as this one. Underlying free cash flow conversion has slowed following hefty capital expenditure.

The nature of warfare is changing at lightning speed. Ukraine has shown what cheap drones can do, while electronic warfare and autonomous systems are advancing by the day. Governments may be reluctant to spend every last pound on enormous, decades-long platforms given today’s rapid obsolescence.

BAE is also investing heavily in autonomy, uncrewed systems, counter-drone technology and electronic warfare, but must constantly keep moving just to keep up.

Check out the forecasts

The last five years have been extraordinary, but I think investors are wary of pushing the stock price higher. Yet brokers seem optimistic. Consensus forecasts of 19 analysts produce a one-year target price of 2,330p. If correct, that would see the BAE Systems share price grow 19% from today.

I won’t be selling my BAE Systems shares. I still see them as a great long-term buy and hold, but it wouldn’t surprise me if they idled for a while. If we got some kind of peace deal in Ukraine or Iran, they might even fall. Sadly for the state of the world, I think that’s unlikely.

Either way, I have enough exposure myself and I’m hunting down other FTSE 100 growth opportunities. This one sorely tempts me…

What growth stock do we like better than BAE Systems right now?

One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential growth.

And the best bit is that you can see if for yourself, right now, absolutely free of charge!

No jargon. No hard sell. Just a clear look at a growth share idea we think is worth your time.

Harvey Jones owns shares in BAE Systems.