UK defence stocks are in focus on Wednesday after Chancellor Rachel Reeves said the country’s defence spending will increase to 2.6% of the gross domestic product (GDP) by April 2027.
This translates to about an £11 billion annual boost aimed at strengthening the military, security, and intelligence sectors.
With this windfall on the horizon, several UK defence contractors stand to gain rather significantly over the next few years.
Here are three that we believe could benefit the most.
BAE Systems Plc (LON: BA)
BAE is widely recognised as the UK’s flagship defence contractor, with a vast portfolio spanning naval vessels, combat aircraft, and cyber-intelligence.
The multinational headquartered in London is on our list as the aforementioned £11 billion increase in defence spending could bolster its key business segments: naval shipbuilding, missile systems, and electronic warfare.
More funding will likely accelerate ongoing programmes like Type 26 frigates and future AUKUS submarines – projects that BAE currently leads.
Even modest increases in defence budgets could bring multi-year contracts worth billions to the aerospace, military, and information security firm.
A healthy 1.77% dividend yield makes BAE stock all the more exciting to own at current levels.
Note that Wall Street has a consensus “overweight” rating on Britain’s largest manufacturer.
Rolls-Royce Holdings Plc (LON: RR)
While best known for jet engines, Rolls-Royce is a significant name in the UK’s nuclear submarine programme – a sector that could benefit if the country increases its spending on defence.
Chancellor Reeves earmarked more than £6 billion for upgrading nuclear submarine production in Barrow-in-Furness and other cities.
Rolls-Royce provides the PWR2 reactors that power the Royal Navy’s subs; enhanced spending ensures sustained engine design, manufacturing, and lifecycle support revenue.
Beyond submarines, RR plays a behind-the-scenes role in military propulsion and power systems, making it a strong indirect beneficiary of spending increases tied to defence infrastructure mandates.
Note that Rolls-Royce stock is also “overweight” rated and pays a dividend yield of 0.67% at the time of writing.
Babcock International Group Plc (LON: BAB)
Babcock shines in naval support, munitions, submarines, and military infrastructure, and today’s spending review singled out £4.5 billion for munitions production, alongside capital investment in naval assets and support.
Babcock’s contracts for maintaining nuclear subs, missiles, and ammunition factories align directly with these priorities.
Its engineered services model – covering through-life support and maintenance – positions BAB to benefit from recurring, high-margin post-deployment work.
As defence commitments deepen, Babcock’s service-centric portfolio could see a significant order and profit uplift.
Wall Street currently has a consensus “buy” rating on Babcock International Group that’s already up more than 100% versus the start of this year (2025).
Additionally, BAB shares currently pay a dividend yield of 0.50%, which makes them an even better pick for income investors.
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