FTSE 100 Stock to Watch for Your ISA in 2025

When it comes to long-term investing, choosing the right FTSE 100 stock can make a big difference to your portfolio — especially inside a Stocks and Shares ISA, where gains are sheltered from UK tax. While markets are always unpredictable, one company stands out right now: BAE Systems (LSE: BA.), the UK’s largest defence contractor.

A World in Transition

A recent Sky News report from Ukraine highlighted a sobering reality: drone production has skyrocketed from 100 units a month at the start of the war with Russia to 100,000 units per month today. And even that isn’t enough to meet demand.

This shift signals a changing defence landscape, where unmanned systems could play a central role in future warfare. One factory worker put it bluntly: “Drones will soon replace humans on the battlefield.”

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If this prediction proves true, defence firms capable of delivering reliable drone and counter-drone technology may benefit significantly.

Why BAE Systems Could Benefit

BAE Systems is already a critical supplier to the UK Ministry of Defence and has a global footprint across air, sea, land, and cyber defence. In 2024, the company strengthened its uncrewed air systems (UAS) capabilities with several acquisitions, positioning itself at the forefront of drone technology and counter-drone systems.

The company has also upgraded its TRIDON anti-aircraft defence system, designed to handle the growing threat of UAS “swarm” attacks. This adaptability demonstrates why BAE is seen as a resilient long-term investment, not just a short-term play on the Ukraine conflict.

Beyond drones, BAE builds fighter jets, submarines, and combat vehicles, giving it a diversified revenue base. At the end of June 2025, it reported an order backlog worth £75.4bn — around three times its annual sales. That kind of visibility offers reassurance for investors worried about volatility.

What Analysts Are Saying

So, what’s the financial case? Analysts currently expect BAE Systems to report earnings per share (EPS) of 75p in 2025. Based on its share price, the stock trades on about 23 times forward earnings. That’s not cheap, but many experts still see it as undervalued by around 19%. The most optimistic forecasts suggest it could climb by as much as 43%.

Looking further ahead, EPS could rise by 36.5% between 2024 and 2027, showing strong growth momentum if forecasts hold true.

The Dividends Question

For income investors, however, the current 1.9% dividend yield may feel underwhelming — especially compared to the FTSE 100 average of 3.4%. But this could be offset by capital growth. If the share price continues its upward trend, total returns could still be attractive, particularly in a tax-free ISA wrapper.

Risk Factors to Consider

No investment is risk-free. Defence spending is heavily influenced by politics and government budgets, which can shift quickly. In addition, shares that look “undervalued” still depend on earnings growth materialising. Finally, compared to higher-yielding FTSE 100 stocks, BAE may not appeal to investors who prioritise steady dividend income.

That said, the company’s scale, order book, and involvement in next-generation defence technology make it one of the more defensive stocks in the market — a quality that some ISA investors value highly.

Should You Add BAE Systems to Your ISA?

With wars, geopolitical uncertainty, and rapid advances in military technology shaping the defence sector, BAE Systems stands at the centre of it all. Its dominance in the UK market, expanding role in drone technology, and solid order pipeline provide a strong case for consideration

While the dividend yield is lower than some FTSE 100 peers, potential earnings growth and share price appreciation may make it a smart choice for long-term ISA investors seeking growth rather than income

Final Thoughts

A Stocks and Shares ISA is about building wealth tax-efficiently over time. While past performance never guarantees the future, BAE Systems looks well-positioned to benefit from both immediate defence needs and longer-term industry trends.

If drones truly are the future of warfare, this FTSE 100 giant may just be one of the best ISA picks in 2025.