Top Defence Contractors See Cash Flow Surge from Rising Demand

Defence Contractors Cash Flow Surge

The world’s largest aerospace and defence companies are set to rake in record levels of cash over the next three years, driven by increasing government orders for new weapons amid rising geopolitical tensions. The leading 15 defence contractors are forecast to log free cash flow of $52bn by the end of 2026, almost double their combined cash flow at the end of 2021.

US Defence Contractors to Benefit Most

• Five top US defence contractors are expected to generate cash flow of $26bn by 2026.
• Excludes Boeing due to its recent challenges in the civil aerospace sector.

European Giants Also Gain

In Europe, national champions BAE Systems, Rheinmetall, and Saab are projected to see their cash flow jump by over 40% thanks to new contracts for ammunition and missiles.

Government Spending Drives Orders

The industry is benefiting from a sharp increase in military spending as governments bolster budgets in response to global crises. US aid bills allocated nearly $13bn for arms production, while the UK committed £7.6bn for military aid.

• Order books are now at near-record highs, with sales translating through delayed contract implementation.
• Analysts debate potential uses for burgeoning cash flows, with buybacks and dividends being typical strategies.

Watch for M&A Activity

Companies will also seek more deals, although regulatory scrutiny may constrain larger acquisitions. Rheinmetall's recent $950mn acquisition of Loc Performance indicates a trend towards aligning with US military requirements.

Future of Defence Spending

While expansion in defence spending is expected, analysts caution about the cyclical nature of defence contracts. Political dynamics may rapidly shift, impacting future demand cycles.