It’s no secret that BAE Systems (LSE: BA) shares have done fantastically well in recent times. In fact, only Rolls-Royce has performed better in the last three years.

Here, I’ll take a look at how much I’d have on paper if I’d stuck five grand into this FTSE 100 defence stock 12 months ago.

Generating wealth

BAE shares were changing hands for 948p one year ago. As I write, they’re trading at 1,384p.

That represents a very impressive gain of 46%, which smashes the blue-chip index’s 8.1% rise over the same period. And it means a £5,000 investment made back then would now be worth around £7,300.

On top of this, I’d have received approximately £158 in dividends.

Strong guidance

In May, the company maintained its full-year 2024 guidance. That’s for a 10%-12% rise on last year’s £25.2bn in sales, with underlying earnings before interest and tax increasing 11%-13% from £2.7bn.

Between 2024 and 2026, it expects to generate more than £5bn in cumulative free cash flow.

The firm said: “Defence spending is high across our sectors and key markets. The recent passing of the US supplemental aid package to Ukraine and the commitment by the UK Government to spend 2.5% of GDP by 2030 should build further positive momentum.”

This refers to the recent $95.3bn US aid package to Ukraine, Israel, and other partners. This included around $67bn in extra spending for military equipment.

Valuation

After its strong run, the stock is trading at 20.5 forward earnings. That’s much higher than its historic multiple, which could add some valuation risk, especially if global defence budgets are suddenly cut.

While that’s possible, I unfortunately don’t think it’s likely. Ukraine is now firing American weapons into Russia after Washington lifted a ban on doing so.

Meanwhile, the Nordic, Baltic, and Eastern European states are desperately arming themselves to fend off a potential Russian attack as Ukraine’s army and reserves dwindle. And plans for a ‘drone wall’ across NATO countries to patrol the alliance’s eastern border have been reported.

That’s just Europe. There are also the ongoing conflicts in the Middle East, and China recently carried out two full days of military drills around Taiwan that simulated a full-scale attack.

For me then, the stock’s higher valuation simply reflects the sad reality that defence budgets are likely to rise further then remain elevated for a long time to come.

My move

I bought BAE shares in 2022 after Russia’s invasion of Ukraine fundamentally altered the geopolitical landscape. I also didn’t see the superpower tensions between the US and China ending anytime soon.

Consequently, I expected higher military spending to translate into growing sales, profits, share buybacks, and dividends at BAE. It was a pretty simple investment thesis (often the best ones).

The firm has now completed over 90% of its £1.5bn three-year share buyback programme. In August, another buyback of up to £1.5bn was approved and should start soon.

Looking ahead, I reckon the stock will move higher, albeit not as dramatically as in recent years due to its higher valuation. So I intend to keep holding it.

If I didn’t already own the shares, I would consider investing today.