When most investors think about the FTSE 100’s best-performing defence stocks this year, one name dominates the conversation: Rolls-Royce.

But there’s another defence giant that has quietly outperformed it in 2026, trades on a lower valuation, and is backed by one of the strongest order books in European aerospace. So, what’s the stock and is it worth a closer look?

How do the numbers compare?

The stock in question has returned 27.9% year-to-date, compared with 27.2% for Rolls-Royce. Here’s how the two line up side by side:

This stock

Rolls-Royce

YTD return

+27.9%

+27.2%

Market cap

£67.3bn

£126.8bn

P/E ratio

32.1

42.1

Dividend yield

1.7%

0.7%

Two things stand out immediately. First, this stock has delivered marginally stronger returns in 2026 on a lower price-to-earnings (P/E) ratio. Second, its dividend yield of 1.7% is more than double what Rolls-Royce offers. So what’s the stock in question, and what’s the real story behind the outperformance?

Are investors sleeping on this defence giant?

The stock I’ve been watching is BAE Systems (LSE: BA.), the UK’s largest defence contractor and one of the most strategically significant businesses on the Footsie.

At 2,244p as I write ahead of the market opening on Tuesday (11 August), this year’s gains have been supported by a record order backlog of £83.6bn and rising NATO defence budgets across Europe.

I think the company’s growth story rests on three pillars:

A record order backlog providing future revenue visibility.

Rising European defence spending commitments following the ongoing conflicts in Ukraine and the Middle East.

A disciplined capital returns programme, with a quarterly dividend of 9.45p per share and an ongoing buyback.

The P/E ratio is 31.8 and not cheap, but it looks considerably more modest than the 42 times earnings the market is currently paying for Rolls-Royce. I think the valuation gap makes it worth considering for investors wanting some defence exposure at a lower relative valuation.

What could go wrong?

The shares sit 5% below their 52-week high of 2,360p, a reminder that sentiment can cool even in a sector with a strong outlook from an investment perspective.

There has been uncertainty in the UK political environment, and defence spending commitments have been a big factor. After all, any defence policy changes could impact on the domestic order pipeline.

Execution risk on large, complex contracts is a permanent feature of the defence sector, and cost overruns on any single major programme could weigh on margins.

The breadth and depth of our geographic and product portfolio, together with our trusted track record of delivery, strengthen our confidence in the positive momentum of our business.

CEO Charles Woodburn

My verdict

In my view, BAE Systems deserves more attention than it seems to get relative to Rolls-Royce.

The returns in 2026 have been stronger, the valuation is more modest, and the dividend a little higher.

I am watching the shares closely at current levels, particularly for any update on European order flow in the second half of the year.

While there are other Footsie opportunities I’m assessing at the moment, I think this stock is one for investors wanting defence sector exposure to consider today.

Should you invest £5,000 in BAE Systems right now?

When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BAE Systems made the list?

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Ken Hall does not hold any positions in the companies mentioned.

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