Deciding what to place in my Shares and Shares ISA isn’t straightforward. There are over 60,000 listed firms to select from, overlaying a mess of nations and industries. However the defence sector is one which I’ve by no means invested in.

And this begs the query: is it moral to attempt to make cash from firms promoting arms and different navy {hardware}? In any case, these merchandise are designed to kill individuals and inflict most injury on property.

Battle(ed)

Monday (24 February) was the third anniversary of Russia’s invasion of Ukraine.

And since this date, the BAE Techniques (LSE:BA.) share price has greater than doubled. It’s a proven fact that many traders have profited from the struggle.

With the group’s monetary efficiency bettering considerably throughout this era, it’s not stunning that its share price has elevated a lot.

Evaluating 2024 with 2021 — the final full 12 months earlier than the struggle began — gross sales have elevated by £7bn (33%), new orders are up £12.2bn (57%), and earnings per share has risen by 43%.

The corporate’s medium-term prospects additionally seem like assured. At 31 December 2024, the order backlog was £77.8bn, practically 3 times the group’s annual gross sales.

And with President Trump wanting NATO members to spend extra on their armies, navies, and air forces, this pattern might proceed. Certainly, the UK authorities introduced a rise this week.

In 2025, the corporate is anticipating gross sales to extend by 7%-9%. And it’s predicting an 8%-10% improve in earnings per share. Bear in mind, these forecasts had been made lengthy earlier than America’s president re-ignited the talk on European defence spending.

Worth for cash?

However I don’t suppose the corporate’s shares are low-cost. They at present commerce on a historic (2024) price-to-earnings (P/E) ratio of 20, comfortably above the FTSE 100 common of roughly 14. Nevertheless, it’s the identical as, for instance, Lockheed Martin, the world’s largest (by way of income) defence contractor. Though, US firms do normally appeal to a better valuation a number of than their UK friends.

And if BAE Techniques can improve its post-tax income by 10% in 2025, it implies a ahead P/E ratio of 18.4. This doesn’t appear unreasonable for a quickly rising inventory.

However some traders use the P/E-to-growth ratio (PEG) to evaluate worth for cash. With a determine in extra of 1, some would conclude that the inventory is buying and selling at a premium to its development fee. In different phrases, it’s overvalued.

One other concern I’ve is that it’s closely reliant on the US, which accounts for over 40% of income. I assume President Trump needs NATO members to spend extra in order that the world’s solely navy superpower can spend much less.

Choice time

Personally, I wouldn’t rule out investing within the sector. I subscribe to the view that it’s the primary responsibility of presidency to maintain its individuals secure. And BAE Techniques has benefitted from elevated navy spending by these attempting to defend Ukraine from an aggressor.

Some traders distinguish between typical and unconventional (for instance, cluster munitions) weapons, refusing to fund firms making the latter. I agree with this strategy. And so far as I’m conscious, BAE Techniques doesn’t manufacture these.

However I don’t need to make investments. I feel the current share price rally means I’ve most likely left it too late. And its dividend isn’t excessive sufficient — the inventory at present yields 2.3% — to compensate.