Are European Defense Stocks the Best-Kept Investment Secret?

Once you’re in, you’re in for the long haul—and the payoff can be massive

Feb 26, 2025

Europe is weaponizing its wallet—and savvy investors are taking note.

Spurred by geopolitical chaos and decades of American nagging, EU nations are racing to arm up—with budgets set to smash €400 billion by 2026.

In this article, I’ll introduce you to the major players, reveal their competitive “moats,” and show how you can position yourself for potential multi-year gains in this rapidly evolving, high-stakes sector.

Europe’s Defense Boom: Why Now?

Because Washington keeps complaining Europe isn’t paying its fair share for NATO—and Europe’s tired of the scolding.

This, plus some real fears around global instability, is pushing EU nations to throw more euros at their own defense budgets.

Defense Spend Trends:

The European Defense Agency noted that collective defense budgets among EU members topped roughly €326 billion last year—up from around €240 billion just a couple of years earlier. Projections suggest crossing €400 billion over the next two or three years if tensions remain.

Key Trigger Points:

German rearmament push, NATO spending targets, and an overall desire for “sovereign defense capabilities.” Once a contract is in motion, it typically spans decades.

For you, that’s the sweet promise of long-term revenue streams—if you pick the right players.

The “Big Moat” Factor

Large defense contractors often enjoy near-monopoly status in their specific niche—like a specialized missile system or advanced radar platform.

That’s a moat, folks.

In Europe, those moats can be even deeper because of language barriers, government favoritism, and long-standing relationships.

Translation: Once a company’s in, they’re often in for decades. That means steady revenue for patient investors.

The Bureaucratic Maze

Imagine five committees stuck in a conference room arguing over the shape of a drone’s windshield—for two years.

That’s EU procurement.

But the one advantage is that once a deal is inked, it can be huge and multi-year.

Investor takeaway:

Congratulations if you see your targeted defense stock on the “short list” for a major contract.

Just don’t expect immediate revenue. Contracts in Europe are like fine wine: They take time, may fail to mature, and occasionally leave a sour aftertaste.

Spotlight on the Major Players

Rheinmetall (Germany) — `RNMBY or RNMBF`

Core Strength: Munitions, armored vehicles, robust land systems.

Recent Performance: After a strong run in 2022–23, it hovers at a P/E around the high teens to low 20s (approximate). That’s not cheap, but it’s no triple-digit mania either.

New Orders: Boasts a backlog worth several billion euros, partly due to German rearmament projects.

What to Watch: Any big contract from Berlin’s special “Bundeswehr upgrade fund.” Rheinmetall’s name is plastered all over it.

Thales (France) — `THLLY or THLEF`

Core Strength: Cybersecurity, electronics, satellite systems, plus a big presence in avionics.

Valuation: Typically trades at a P/E in the mid-teens. The share price saw a modest jump last year after new space and cybersecurity deals were announced.

Revenue Growth: Averaging ~5–6% YoY the past few years. Not massive, but steady.

Moat Factor: Embedded in Europe’s high-tech infrastructure, from digital security to radar. That means if the EU funds more advanced, “homegrown” solutions, Thales could win big.

Leonardo (Italy) — `FINMY or FINMF`

Core Strength: Helicopters, defense electronics, and a piece of the Eurofighter Typhoon.

Valuation: Tends to trade cheaper than French/German peers. In 2022, the P/E hovered around 10–12, reflecting some investor hesitance about Italy’s economy.

Backlog & Growth: Has a strong backlog in choppers and training jets, plus partnerships for global exports.

Risk/Reward: If you believe the market undervalues Italian defense due to macro jitters, Leonardo could be your contrarian darling.

Saab (Sweden) — `SAABY or SAABF`

Core Strength: Gripen fighter jets, submarines, cutting-edge electronics.

EPS Growth: Over the past few years, EPS growth has been modest (low single digits), in part due to ongoing R&D.

Catalyst: Sweden’s potential NATO membership can catapult more orders.

Caution: Big aerospace and submarine projects burn cash before they print profit. Translation: patience required.

BAE Systems (UK) — `BAESY or BAESF`

Core Strength: A broad lineup—armored vehicles, warships, aircraft. A top-tier global defense player.

Dividend Yield: Typically 3–4% range, relatively stable. That’s music to a dividend-focused investor’s ears.

Valuation: Historically trades in the mid-teens P/E. Share price has seen steady climbs, buoyed by consistent defense deals from both European and US markets.

Brexit Factor: Hasn’t crippled them. They remain a defense giant with robust US ties.

Airbus (Pan-European) — `EADSY or EADSF`

Defense & Space Segment: Often overshadowed by its commercial aircraft division, but the defense arm is significant and includes transport aircraft, satellites, and now ramping up drone programs.

Valuation Split: Overall Airbus might trade at a P/E around 15–20, but that lumps in the commercial side.

Growth Potential: IAirbus is almost guaranteed a slice if Europe invests heavily in a next-gen fighter or drone program

Risk: Commercial jet cycles can overshadow defense performance. The stock can tumble despite the defense backlog if airlines slash orders in an economic downturn.

The “Quick & Dirty” Blueprint

Time to get tactical. Here are some strategies to deploy in your portfolio based on new data and forecasts:

If You Believe the Euro Will Strengthen:

Front-Load in Euro-Denominated Stocks:
Lock in positions in companies like BAE Systems and Thales, reinvesting dividends in euros to benefit from currency appreciation.
Data Insight: Currency hedging might cut costs by an extra 3–5% in annual returns if managed properly.

If You Think the Sector Is Overheated:

Stagger Your Entries: Use a phased approach over 6–12 months. Recent volatility in Rheinmetall’s shares, which surged 57% this year, suggests a correction might be due if contract news lags.
Hard Data Tip: Monitoring P/E ratios and order backlog announcements can signal when a dip occurs.

For the Dividend Chaser:

Focus on Stable Payers: Prioritize BAE Systems and Airbus. They have a proven track record of dividends that have grown consistently—BAE’s current yield of 3–4% has shown resilience, even when market sentiment is cautious.
Proof Point: Dividend payout ratios under 50% often forecast sustainable growth; look for companies that meet this criterion.

For Growth-Oriented Investors:

Go for Rheinmetall or Saab: These volatile stocks offer significant upside if new defense contracts materialize. Rheinmetall’s recent surge is partly due to its robust order book, a sign of high future revenue potential.
Analytical Insight: Expect EPS growth to accelerate by 5–8% once multi-year contracts kick in.

Macro “Checkpoints” to Watch

These indicators, grounded in hard data, are your radar for the EU defense sector:

Budget Announcements: Watch Germany’s defense budget. Merz’s promise to lift debt brakes could free up an additional €100 billion over the next few years
NATO & EU Summits: Key summits and defense strategy updates often serve as catalysts. For instance, the recent NATO summit pushed EU defense stocks higher by over 3% in a single day
Contract News: Big deals, like BAE’s $2.5 billion CV90 contract, are major inflection points for stock performance.
Currency Trends: Monitor EUR/USD fluctuations. A 10% swing can materially affect returns if you're repatriating gains.

Europe’s defense sector is a complex beast—messy, bureaucratic, and slow—but it also has long-term potential.

But if you’re serious about building a global, dividend-rich, and growth-oriented portfolio, European defense stocks—backed by robust data and geopolitical momentum—offer a unique, contrarian play that’s as lucrative as it is intellectually satisfying.

Thank you for reading,
Mike