Rolls-Royce and BAE Systems shares break records

A Rolls-Royce aircraft engine during the Hannover Messe industrial trade fair, Germany, in March 2025. Credit: Ronny Hartmann/AFP via Getty Images.

Rolls-Royce Holdings (LSE:RR.) is today firmly established in the FTSE 100 index top 10 after its shares and those of BAE Systems broke new ground in another strong session for the defence and aerospace sector.

The engines giant touched a record 862p, while BAE Systems (LSE:BA.) traded above 1,900p for the first time as the heavyweight pair left the FTSE 100 within 85 points of March’s all-time high.

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Their latest rises followed comments by NATO secretary-general Mark Rutte that he expects member countries will next month agree a defence spending target equivalent to 5% of GDP.

His comments fuelled an already strong month for Rolls and BAE after they were lifted by the defence and security pact that formed a key part of the EU-UK trade deal signed on 19 May.

In a review of the sector ahead of next month’s Paris Air Show, Bank of America pointed out today that defence valuation multiples have re-rated 40% year-to-date as investors now have increased conviction in the duration of the EU defence cycle.

It adds that the sector is expected to deliver about 12.5% organic top-line growth between 2024 and 2028, which compared with about 5% in 2017-21.

The bank said: “Valuations are significantly elevated versus history. Yet to us, this is justified given the mid- to long-term growth outlook of the sector.”

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In civil aerospace, it has a target price for Rolls of 1,150p after noting that the Derby-based company continues to trade at a material discount to the sector.

It added: “We believe there is still scope to close the valuation gap as Rolls delivers on its 2025 guidance and we get more colour on the capital allocation approach of the group beyond 2025.”

BAE shares have advanced by more than 25% since their post-tariffs low of 1,497p on 7 April and by more than 60% in a year when the company has closed its valuation gap to US peers.

The advance has propelled BAE’s market capitalisation to about £55.8 billion, good enough for 12th place in the list of largest FTSE 100 companies.

Rolls is currently worth £71.3 billion, having overtaken the likes of GSK (LSE:GSK) and BP (LSE:BP.) on its way to becoming the London market’s eighth-largest stock.

It is on the brink of overhauling British American Tobacco (LSE:BATS) in seventh and is not far behind £77 billion-valued RELX (LSE:REL) in fifth. The big four are AstraZeneca (LSE:AZN), HSBC Holdings (LSE:HSBA), Shell (LSE:SHEL) and Unilever (LSE:ULVR).

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Rolls shares were less than 100p in early 2023, when newly appointed chief executive Tufan Erginbilgic likened the engines giant to a “burning platform”.

His focus on commercial optimisation and cost efficiencies has delivered a faster-than-expected turnaround in operating profit and cash generation, aided by the return of engine flying hours to above pre-Covid levels and favourable conditions in key sectors.

Recent highlights in defence have included a five-year contract with the Ministry of Defence for the maintenance and service of the EJ200 engine that powers the Royal Air Force’s Typhoon aircraft.

It has also delivered the first engine to Boeing for the MQ-25 programme, which is the US navy’s first aircraft carrier-based unmanned air vehicle to be used for refuelling, intelligence and surveillance.

About 50% of divisional revenues are to the US, much of which is insulated from tariff risks by being locally manufactured.

Rolls shares were at 763p after the company’s most recent update on 1 May, having rallied from the 635.8p seen at the height of market turmoil of 7 April.

This month’s strong advance has left many City analysts scrambling to keep up after they retained their Buy recommendations in the wake of the AGM update, when Erginbilgic told shareholders that a “more resilient and agile” Rolls was better equipped to respond to external challenges.

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Morgan Stanley highlighted a price target of 900p after noting that Rolls had joined GE Aerospace (NYSE:GE) in confirming guidance inclusive of tariffs, representing a more bullish stance than some peers.

UBS stood at 1,000p having moved its recommendation from 640p in the days following February’s forecast-beating annual results.

Those full-year figures included plans to pay a dividend of 6p a share, the first distribution since January 2020, on 16 June. Rolls is also buying back £1 billion of its shares, a surprise move which sparked a 15% surge for shares on the day of annual results.

Despite the strong run for shares over the past two and a half years, retail investors continue to be fired up by the Rolls story after the company ranked as the sixth-most popular stock to buy in ISAs on the interactive investor platform last week.