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Europe’s largest defence groups are set to return close to $5bn to shareholders this year as the sector rewards investors and increases investment after a surge in global military spending following the war in Ukraine.
The bulk of the bumper returns this year at eight of Europe’s largest defence companies is in the form of higher dividends, according to analysis of the past decade by Vertical Research Partners for the Financial Times.
The research, which is focused on the largest defence players and excludes Airbus given its large commercial operations, shows that payouts are on course to reach a 10-year high.
Despite the payouts, the research also shows that European defence sector investment has risen significantly since Russia’s full-scale invasion of Ukraine nearly four years ago as companies have expanded production.
By contrast, shareholder returns by the six largest defence companies in the US — Lockheed Martin, General Dynamics, Northrop Grumman, RTX Corporation, L3Harris Technologies and Huntington Ingalls — have fallen after hitting a 10-year peak in 2023.
At the same time investment — capital expenditure and self-funded research and development calculated as a percentage of sales — has dropped slightly. Boeing is excluded given its large civil aerospace operations.
The industry has drawn criticism, notably in the US, over doubts that it is investing the proceeds of the boom to boost production of new weapons and not simply spending those gains on share buybacks.
Donald Trump has urged defence contractors to invest money in production, boosting returns to shareholders. He is due to discuss such issues with companies in Florida this week.
His comments follow those of US Treasury secretary Scott Bessent, who said in October that the country’s defence companies were “woefully behind in terms of deliveries, so we may have to, as their biggest customer . . . prod them to do a little more research, a little fewer stock buybacks”.
Rob Stallard, analyst at Vertical Research, said the accusation that the US defence industry had underinvested or was “profiteering” was “not supported by the facts”.
“Buybacks and dividends as a percentage of market cap [of US companies] have almost halved over the past two years.”
Vertical’s research shows that the average investment of the basket of European companies analysed — measured as capex plus R&D spend as a percentage of revenues — is expected to rise to 7.9 per cent in 2025. In 2021, the year before the start of the conflict in Ukraine, this figure was 6.4 per cent.
Public debate about the issue in Europe has so far been limited but some industry experts believe that given the significant spending pledges announced by governments, they could become more involved.
“If defence spending rises to a certain level, significantly higher than it is now, then defence becomes so important to the governments that they will become very interested in how much money you are making,” said Nick Cunningham, analyst at Agency Partners.
At the same time, he added, the industry in Europe was “not ramping up”.
“If you are operating in a capacity-constrained environment, coining it and buying back stock, that will not be going down very well. So you should make a big song and dance around how much you are investing,” he added.