Government orders for weapons are expected to increase due to escalating geopolitical tensions, leading to a surge in cash flow for global aerospace and defense companies over the next three years.

What Happened: Vertical Research Partners projected that the top 15 defense contractors worldwide will generate a free cash flow of $52 billion in 2026, nearly double their combined cash flow at the end of 2021, Financial Times reported on Monday.

Five leading U.S. defense contractors, excluding Boeing (NYSE:BA), are projected to produce a cash flow of $26 billion by the end of 2026, more than double the amount in 2021. In Europe, defense giants like BAE Systems, Rheinmetall, and Saab are expected to see a combined cash flow increase of over 40%.

The industry’s growth is linked to a sharp rise in military spending as governments bolster their budgets in response to Russia’s invasion of Ukraine and mounting tensions in the Middle East and Asia. The U.S. has allocated nearly $13 billion for weapons production at its five largest defense groups, including Lockheed Martin (NYSE:LMT), RTX (NYSE:RTX), Northrop Grumman (NYSE:NOC), Boeing, and General Dynamics (NYSE:GD), and their suppliers. The UK Ministry of Defence has committed £7.6 billion ($10.03 billion) for military aid to Ukraine over the past three years.

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This surge in government spending has already pushed order books to near-record highs. The industry is now debating how to utilize the growing cash flows, with potential options including share buybacks, dividends, and acquisitions.

Why It Matters: Recent developments in the industry include the Pentagon’s Defense Innovation Unit’s plan to boost startups with increased funding and support, Lockheed Martin’s doubling down on army contracts, and General Dynamics’ $1.3 billion contract modification from the U.S. Department of Defense.

However, Boeing’s negotiations with the U.S. Defense Department following its guilty plea could potentially impact its ability to secure future contracts.

Price Action: During Monday’s pre-market, Invesco Aerospace & Defense ETF (NYSE:PPA) was trading 0.03% lower while SPDR S&P Aerospace & Defense ETF (NYSE:XAR) was trading 0.05% higher, as per Benzinga Pro.

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Photo courtesy: Lockheed Martin

This story was generated using Benzinga Neuro and edited by Pooja Rajkumari