Top Defence Contractors Poised to Generate Record Cash as Orders Surge

The world’s largest aerospace and defense companies are projected to accumulate unprecedented levels of cash over the next three years, driven by a surge in government orders for new weapons due to escalating geopolitical tensions. An analysis by Vertical Research Partners for the Financial Times indicates that the top 15 defense contractors are expected to generate approximately $52 billion in free cash flow by 2026, nearly doubling their combined cash flow from the end of 2021.

In the United States, five major defense contractors are anticipated to produce $26 billion in cash flow by the end of 2026, more than double the amount from 2021, excluding Boeing, which faces challenges related to its civil aerospace segment. European defense firms, including BAE Systems, Rheinmetall, and Saab, are also set to benefit from new contracts for ammunition and missiles, with their collective cash flow expected to rise by over 40%.

This growth in the defense industry can be attributed to a significant increase in military spending, as governments respond to Russia’s invasion of Ukraine and heightened tensions in the Middle East and Asia. The U.S. has allocated nearly $13 billion for weapons production at its top five defense contractors and their suppliers through recent aid packages for Ukraine, Taiwan, and Israel. Similarly, the UK’s Ministry of Defence has committed £7.6 billion in military aid to Ukraine over the past three years, which includes replenishing stockpiles.

With order books nearing record highs, the defense industry faces challenges in managing the anticipated influx of cash. Companies often prefer share buybacks and dividends, as they typically avoid maintaining large cash reserves. Last year saw the highest buyback activity among aerospace and defense firms in both the U.S. and Europe in the past five years, though these levels remain lower than those in other sectors. Mergers and acquisitions are also expected to increase, although regulatory concerns about competition may limit large-scale deals. Recent significant transactions include Rheinmetall’s acquisition of a military vehicle manufacturer and BAE Systems’ $5.6 billion purchase of Ball Aerospace, a key supplier of mission-critical space systems.

While defense spending is expected to remain strong in the coming years, the current surge in orders may eventually decline, especially after the conflict in Ukraine concludes. As noted by Byron Callan of Capital Alpha Partners, the defense industry is cyclical, and changes in political and security dynamics can influence demand.