Since October 2021, BAE Systems (LSE:BA.) shares have more than trebled in value. But over the past 12 months, the defence contractor’s share price has been treading water. Worse, the group’s stock is now (14 October) changing hands for around a fifth less than it was in March.

Could this be a golden opportunity to consider?

Going in the right direction

With increased global uncertainty, BAE Systems’ order backlog has grown to £84bn (at 30 June). For context, that’s equivalent to nearly three times its 2025 revenue.

In fact, the group’s currently the biggest supplier to the Ministry of Defence. And with the government committed to reaching NATO’s target of spending 3.5% of Gross Domestic Product (GDP) on defence by 2035, there could be more to come. However, it now seems unlikely that the chancellor will explain at this month’s budget how this will be achieved. Instead, it will be left to next year’s spending review.

For 2026, the group’s expecting an impressive year-on-year increase in earnings per share of 11%-13%. Free cash flow is predicted to be over £2bn. The 12-month consensus of analysts is that its shares are 26% undervalued.

The elephant in the room

Of course, it’s impossible to write about BAE Systems shares without discussing ethics. From a moral standpoint, investing in the sector can be controversial and, understandably, doesn’t appeal to everyone. This means there’s a smaller pool of investors available to help push the stock higher.

However, I’ve always believed that a nation should protect its people. Even Switzerland, with its policy of neutrality, spends approximately 0.75% of GDP on its military.

Admittedly, President Trump’s decision to rebrand the Department of Defense as the Department of War makes it harder to argue that spending money on defence is a protective rather than hostile act. However, from a personal perspective, I’m comfortable with investing in the industry.

Having said that, with a forward earnings multiple of 22.4, BAE Systems’ shares aren’t in bargain territory. And after a strong rally, it looks as though some shareholders have decided to bank a profit.

My view

However, in my opinion, the recent pullback in the group’s share price presents an opportunity to think about. A significant proportion of its revenue comes from long-term contracts with repeat revenue and the group’s earned a reputation for its quality.

It wasn’t that long ago – in March, in fact — that the stock was trading on 28.3 times expected earnings.

And it’s now yielding 2.2%, assuming the 11% increase in its interim dividend is repeated when its final 2026 payout is declared. Just over six months ago, based on its 2025 payout, it was returning 1.5%. Of course, dividends are never guaranteed.

Yes, there are better returns out there but if the group can continue to deliver the capital growth that shareholders have enjoyed in recent years (its share price has risen by an average of 25% a year since 2021) the dividend would be a welcome bonus on top.

It’s a sad reality that we live in an increasingly dangerous world. As a result, BAE Systems is likely to be one of the beneficiaries. That’s why I think it’s worth considering. However, it’s not the only stock that’s caught my attention recently.

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James Beard does not hold any positions in the companies mentioned.