Several top defence contractors are expected to reap significant profits due to increased defence spending and ongoing global conflicts.

“The industry is benefiting from a sharp increase in military spending as governments increase their budgets in response to Russia’s full-scale invasion of Ukraine and escalating tensions in the Middle East and Asia,” the Financial Times reported earlier today.

Aerospace and defence companies are forecast to have record levels of free cash flow by 2026.  According to an analysis by Vertical Research Partners for the Financial Times, the leading 15 defence contractors are forecast to log free cash flow of $52bn in 2026 – almost double their combined cash flow at the end of 2021.

In Europe, BAE Systems, Rheinmetall and Sweden’s Saab, which have benefited from new contracts for ammunition and missiles, are expected to see combined cash flow jump by more than 40 per cent.

Five top US defence contractors are forecast to generate cash flow of $26bn by the end of 2026, more than double the amount in 2021.  Recent aid bills for Ukraine, Taiwan and Israel allocated nearly $13bn for weapons production at America’s five biggest defence groups – Lockheed Martin, RTX, Northrop Grumman, Boeing and General Dynamics – and their suppliers.

In the UK, the Ministry of Defence has committed £7.6bn for military aid to Ukraine over the past three years, including for stockpile replenishment.

The government spending surge has already propelled order books to near-record highs.  It typically takes several years for new contracts to translate into higher sales – defence companies book the majority of their sales once weapons are delivered – but the growing cash flows are already prompting debate about how the industry will spend the money.

“It’s the billion-dollar question for the industry: companies typically don’t like holding large amounts of cash on their balance sheets, so what do they do with all that money if acquisitions are not that straightforward? Share buybacks and dividends are one way,” said Robert Stallard, analyst at Vertical Research.

While defence spending is likely to remain strong over the coming years, the recent jump in orders will probably tail off, especially once the war in Ukraine ends.

The above is taken from the article ‘Top defence contractors set to rake in record cash after orders soar’ published by the Financial Times on 26 August 2024. The article is behind a paywall so we have attached a PDF of it below.