BAE Systems and Babcock get defence spending boost from Healey appointment

BAE Systems and Babcock International shares received a defence spending boost on 21 July after new Prime Minister Andy Burnham named John Healey as Chancellor of the Exchequer. BAE (BARC: BAE Systems) rose 0.8% and Babcock (LSE: BAB) gained 4% on the day, with investors reading Healey’s appointment as a signal that UK military budgets could be frontloaded more aggressively than the previous government planned.

Why Healey’s move to the Treasury matters for defence

Healey quit as defence minister last month after a public dispute over spending commitments. His resignation letter accused the government of being ‘unwilling to commit the resources that the nation needs to defend the country at this time of rising threats.’ He had argued that hitting NATO‘s 3.5% of GDP defence target by 2035 required an interim step of 3% of GDP by 2030, in line with most European allies. The government’s Defence Investment Plan, he said, implied spending of only 2.68% by 2030, up from 2.6% in 2027.

Now sitting at the Treasury, Healey is in a position to influence the pace and volume of that spending. The market’s logic is straightforward: if he pushes for faster disbursement, UK-oriented defence contractors are the immediate beneficiaries.

BAE Systems and Babcock defence spending exposure compared

The divergence in share price moves reflects a difference in revenue geography. Babcock derived over 70% of its revenue from the UK last year, meaning it would benefit most directly from any acceleration in domestic military budgets. Less than 5% of its sales came from North America.

BAE’s profile is considerably broader. According to the company’s 2025 Annual Report, the United States accounted for 43% of BAE sales, while the United Kingdom contributed 27% and Europe 12%. That geographic spread makes BAE less sensitive to any single government’s spending cycle, but also means it captures less of an immediate UK uplift.

On valuation, BAE trades on a forward price-to-earnings ratio of 21, against Babcock’s 16. BAE also carries a higher dividend yield: 2.2% versus Babcock’s 1.2%. The premium reflects a larger order backlog and stronger operating margins rather than simple sentiment.

GCAP: the programme underpinning BAE’s long-term case

Separately, Canada joined the Global Combat Air Programme (GCAP) as an observer nation on 21 July, announced as new Defence Secretary Wes Streeting hosted his Japanese, Italian and Canadian counterparts. The move carries no financial commitment from Canada, but grants it direct insight into the programme’s capability development and industrial collaboration.

According to the UK Ministry of Defence press release, the government has committed £8.6 billion into GCAP over four years as part of the Defence Investment Plan. Earlier in July, the UK, Italy and Japan finalised a £4.6 billion contract with Edgewing, the industry joint venture, to advance the aircraft’s design through its next stage. The programme supports over 600 companies across the UK supply chain.

Reuters described GCAP as one of two major Western sixth-generation fighter projects, alongside the US Air Force’s Next Generation Air Dominance programme, with the jet designed to operate alongside platforms such as the F-35. Canada’s observer role also fits a broader strategic shift: Prime Minister Mark Carney has set out plans to diversify Canadian defence spending away from the United States.

Canadian Defence Minister David McGuinty said observer status ‘will provide us with the opportunity to deepen our understanding of next-generation combat air capability, strengthen industrial collaboration, and contribute more closely to partnerships that will define the future of airpower,’ according to Breaking Defense.

The risks to the thesis

Both stocks could retrace sharply if UK or European spending commitments are revised downward, or if a Ukraine settlement prompts governments to slow procurement timelines. Babcock, with its concentrated UK exposure, is more vulnerable to any domestic policy reversal. BAE’s US revenues provide a partial buffer, given the scale of American military spending, though that dependence introduces its own political risk.

The Healey-driven re-rating assumes the Chancellor can translate his stated spending ambitions into actual Treasury commitments. Autumn budget decisions will be the first real test of whether today’s market optimism is matched by fiscal reality.