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The traditional boundary between a defence company and an industrial manufacturer is not blurring at the edges, it is collapsing at the centre. For institutional investors who still screen these sectors in separate buckets, the cost of that mental model is growing by the quarter. Dual use dividend is becoming one of the most important structural investment themes of this decade.
Every decade or so, the defence industry goes through something more than a cyclical uptick. It enters a structural rerating event, where the very role that defence capital plays in the broader economy is fundamentally repriced. We are in one of those moments right now. And this time, something is different: the capital is moving in both directions at once.
According to the Stockholm International Peace Research Institute, global military expenditure reached $2,887 billion in 2025, the 11th consecutive year of real-terms growth and a 2.9 percent increase over 2024. Importantly, while total global growth appears to have moderated from the 9.4 percent surge of 2024, that headline figure is almost entirely explained by a drop in US military expenditure, which fell 7.5 percent to $954 billion as Washington paused financial military assistance to Ukraine. Strip out the United States and the rest of the world grew military spending by 9.2 percent in 2025, a figure that tells a very different story.
Europe was the primary engine of that growth. European defence expenditure rose 14 percent to $864 billion in 2025, with Germany increasing spending by 24 percent to $114 billion and crossing the NATO 2 percent of GDP threshold for the first time since 1990. Spain’s spending jumped 50 percent to $40.2 billion, also crossing 2 percent of GDP for the first time since 1994. The European Union separately outlined plans to mobilise up to 800 billion euros by 2030 to bolster regional security. Asia and Oceania rose 8.1 percent to $681 billion. China increased its spending by 7.4 percent to $336 billion, its 31st consecutive year of growth. Japan’s expenditure rose 9.7 percent to $62.2 billion, its highest share of GDP since 1958.
The forward trajectory remains steep. NATO has endorsed a benchmark of 5 percent of GDP annually by 2035, divided into 3.5 percent for core defence requirements and 1.5 percent for security-related civilian infrastructure. The Pentagon has already requested approximately $1.5 trillion in defence spending for fiscal year 2027. SIPRI researchers noted explicitly that given the range of current crises and states’ long-term military spending targets, this growth will probably continue through 2026 and beyond.
The investment community has processed all of this as a defence spending story, and that framing is correct but incomplete. The more important analytical question is not how large the defence budget is becoming. It is where the technology being funded by those budgets ultimately ends up. And the answer, increasingly, is everywhere. The traditional wall between defence and industrial technology is not merely cracking. It is being demolished from both sides at once.
This paper argues that the most durable investment opportunity in the current cycle is not simple defence budget exposure. It is what we call the Dual-Use Dividend: the value created when a company’s core technology permeates both the military and civilian domains simultaneously, reducing revenue cyclicality, improving margin durability, and compressing the rerating timeline. We build a framework to identify it, and apply it to five of the world’s largest and most instructive Industrials and A&D names.
The dual-use phenomenon is not new. What is new is its speed, scale, and bidirectionality. A structured reading of the historical record shows that the current cycle represents the third and most powerful iteration of a pattern that has been building for eight decades.
The defining technology transfer of the twentieth century was unidirectional. Military research and development generated innovations that subsequently colonised civilian life. The internet originated as ARPANET, a US Defence Advanced Research Projects Agency project. GPS was exclusively a US military asset for the first fifteen years of its existence, opened to civilian use only in the 1980s.
Jet engine technology, developed for military aircraft, only reached commercial aviation in the 1950s. The transistor, the foundational component of every electronic device made since 1950, was commercialised by Bell Labs under US military funding. The average technology transfer lag from military origin to commercial application in this era was twenty to thirty years.
The post-Cold War decade saw the pattern begin to invert. Commercial markets, particularly in computing, semiconductors, and communications, began advancing faster than government-funded defence research.
The Pentagon found itself increasingly buying commercial-off-the-shelf technology rather than funding its own development. GPS chips, lithium-ion batteries, satellite imagery, and cybersecurity tools all originated in or were substantially refined by commercial investment before being adopted into military platforms. The transfer lag compressed to five to ten years.
The current era has made the distinction between Phase I and Phase II largely irrelevant, because the most strategically important technologies i.e. AI, autonomy, advanced composites, next-generation batteries, hypersonics are being developed simultaneously for both domains, often by the same companies and sometimes on the same production lines.
The transfer lag has collapsed to near zero. China understood this first. Through its Made in China 2025 strategy, it deliberately engineered a dual-use industrial base, capturing a 24 percent global market share in semiconductor manufacturing and over 90 percent of the global consumer drone market, two technology positions that serve both its commercial and military ambitions in parallel.
The investment implication of this historical arc is clear. The companies that will compound most effectively over the next decade are not those that are simply beneficiaries of a defence budget cycle. They are those whose technology assets are inherently platform-agnostic, serving both domains without modification. That is the structural architecture of the Dual-Use Dividend.
Rather than making a generalised claim about blurring sector lines, we identify three specific and quantifiable technology corridors where the defence-industrial boundary has already structurally collapsed. Each corridor is large enough to be market-moving, growing fast enough to be rerating material, and specific enough to map to individual companies in our coverage universe.
The global unmanned systems market was estimated at $26.6 billion in 2024 and is projected to reach $48.3 billion by 2030, growing at a CAGR of 10.5 percent. The driver is not military procurement alone. The fully autonomous segment is expanding rapidly into civilian domains including last-mile logistics, precision agriculture, environmental monitoring, and port operations.
The most instructive real-world example is the drone. In 2014, a military-grade reconnaissance UAV had no civilian commercial application of note. By 2024, the same underlying technology — lightweight composites, brushless motors, AI-driven flight control, computer vision — powers commercial delivery drones, agricultural spraying systems, and search-and-rescue platforms.
Critically, the technology innovation is now flowing in both directions. DJI’s consumer drone technology, originally built for photography, has been adopted by militaries in over 90 countries for frontline intelligence, surveillance, and reconnaissance. The military robotics and autonomous systems market, the defence-specific slice of this corridor, reached $19.7 billion in 2024 and is projected to reach $32.5 billion by 2030 at an 8.7 percent CAGR.
This corridor is where Industrials and Automobiles coverage directly intersects with Aerospace and Defence, and where the dual-use dynamic is most financially material for large-cap names. Carbon fibre composites were originally developed for military aircraft frames to reduce weight without sacrificing structural integrity. Carbon fibre is now the core material in commercial widebody aircraft (the Boeing 787 is 50 percent composite by weight), high-performance electric vehicle chassis, and wind turbine blades.
Lithium-ion cells developed to power military drones and mobile tactical systems are now the backbone of the electric vehicle revolution. The reverse flow is equally important. The cost compression achieved through EV-scale battery manufacturing, with average pack cost falling from approximately $1,200 per kWh in 2010 to $137 per kWh by 2023 according to BloombergNEF, has made advanced energy storage affordable for military applications that previously could not justify the cost.
Rolls-Royce provides perhaps the most compelling single example of this corridor in action. Nuclear propulsion technology developed for military submarines, a programme where the company has operated for over six decades, is now being scaled into civilian Small Modular Reactor designs for power generation. Rolls-Royce SMR was selected in 2025 as the sole preferred provider for the UK’s first small modular reactor programme, with management guidance that the SMR division will be profitable and free cash flow positive by 2030.
The US DoD allocated $64.1 billion in its FY2025 budget to IT and cyberspace operations alone, a figure that exceeds the total defence budgets of most European nations. That software, once written, does not stay inside the fence. The AI models trained on military intelligence data, the predictive maintenance algorithms developed for fighter jet fleets, and the secure communications infrastructure built for battlefield use all have direct commercial analogues.
Investment in dual-use technology more broadly surged 25 percent from $954.5 billion in Q3 2024 to nearly $1.2 trillion by May 2025. Defence tech-specific investment jumped 27 percent to $70.8 billion. As of May 2025, 17,619 dual-use technology scaleups were operating across NATO countries, with roughly 70 percent of all new scaleup investment in this period flowing to dual-use companies rather than pure-play civilian or pure-play military firms. The market is voting with capital. The dual-use model generates more investor conviction than either end of the spectrum alone.
Identifying dual-use exposure qualitatively is easy. Almost every major Industrials or A&D company will claim some version of it in their investor presentations. What matters analytically is a structured way to score the depth, durability, and policy support of that exposure. We propose the DUD Framework: three dimensions, each scored 1 to 5, generating a composite score out of 15 that predicts long-cycle compounding potential rather than short-cycle budget sensitivity.
| THE DUD FRAMEWORK | |
| D | Depth of Technology Overlap How deeply does the company’s core technology permeate both the military and civilian domains? Score on: the proportion of research and development that is inherently platform-agnostic; the number of distinct end-markets served by the same underlying intellectual property; and bidirectionality, meaning whether innovation flows from defence to commercial AND commercial to defence, or only one way. A score of 5 implies the same physical asset or software stack generates revenue in both domains without material modification. |
| U | Urgency of Government Mandate Is policy actively pulling this company’s technology into defence, or mandating dual-use capability development? Score on: active government procurement programmes that specifically reference the company’s technology; relevant policy tailwinds such as the EU European Defence Fund, NATO’s DIANA initiative, the US Defence Innovation Unit, and domestic industrial policy; and export control risk, which asks whether the company can monetise its technology globally or whether domestic procurement dependency creates a structural revenue ceiling. |
| D | Duration of Revenue Visibility Is the dual-use positioning creating long-cycle, compounding revenue or a one-contract windfall? Score on: order backlog as a multiple of current annual revenue; the proportion of backlog from multi-year framework contracts versus spot orders; and whether civilian revenue genuinely diversifies the earnings base or merely dilutes the defence margin profile. A score of 5 implies backlog coverage exceeding 4x revenue and a demonstrably diversified customer base across geographies and contract types. |
| Scores of 12+ indicate structural compounders. Scores of 8 to 11 indicate rerating candidates pending execution. Scores below 8 indicate budget-cycle trades. | |
The framework is intentionally quantitative-first. Every dimension score must be anchored to a disclosed financial metric or policy document rather than a qualitative judgment call. Companies that score 12 or above on the DUD Framework are, in our view, structural compounders. Those scoring 8 to 11 are rerating candidates pending execution. Those below 8 are budget-cycle trades, not long-cycle positions.
We apply the DUD Framework to five companies spanning the US and European A&D and Industrials universe. These are not stock recommendations. They are analytical case studies designed to demonstrate how the framework differentiates compounders from cyclicals within the same sector. All financial data is sourced from primary FY2025 filings, released between January and March 2026.
| Company | D: Depth | U: Urgency | D: Duration | DUD Total |
|---|---|---|---|---|
| Rheinmetall RHM GY · Germany | █████ 5/5 | █████ 5/5 | █████ 5/5 | 15/15 |
| RTX Corporation RTX US · United States | █████ 5/5 | ████░ 4/5 | █████ 5/5 | 14/15 |
| Rolls-Royce RR/ LN · United Kingdom | █████ 5/5 | █████ 5/5 | ████░ 4/5 | 14/15 |
| BAE Systems BA/ LN · United Kingdom | ████░ 4/5 | █████ 5/5 | █████ 5/5 | 14/15 |
| Lockheed Martin LMT US · United States | ████░ 4/5 | █████ 5/5 | █████ 5/5 | 14/15 |
| RHM GY | Germany | DUD Score: 15/15 Rheinmetall: The Archetype |
€9.9 billionFY2025 Revenue (+29% YoY)€63.8 billionOrder Backlog (6.4x revenue)18.5%Group Operating Margin |
| Rheinmetall is the single clearest live demonstration of the Dual-Use Dividend thesis, a company that has spent the past six years physically converting its civilian automotive manufacturing infrastructure into defence production lines. The FY2025 numbers are exceptional. Consolidated sales reached €9.9 billion, a 29 percent year-on-year increase from €7.7 billion, with an operating result of €1.84 billion, up 33 percent. The operating margin expanded to 18.5 percent. |
| The order backlog reached a new all-time high of €63.8 billion at year-end 2025, representing 6.4x annual revenue, compared with €46.9 billion at the prior year-end. Management expects the backlog to more than double again during 2026, driven by the Naval Vessels Lurssen acquisition, approximately €80 billion in expected new nominations, and the European SAFE programme totalling €150 billion. For 2026, the group expects sales growth of 40 to 45 percent, targeting €14.0 to €14.5 billion in revenue with an operating margin of approximately 19 percent. |
| What earns Rheinmetall a perfect DUD score is not the numbers alone but the underlying mechanism. The company has discontinued its automotive activities, which are up for sale, and will now focus entirely on the defence business. The same precision manufacturing tooling, supply chain relationships, and engineering workforce that built automotive components is being redeployed to manufacture artillery shells (targeting 700,000 rounds per year by 2026), armoured vehicle hulls, electronic warfare components, and, through the Lurssen acquisition, naval vessels. The Weapons and Ammunition segment alone delivered a 29 percent operating margin in FY2025. Vehicle Systems reached a revenue of €5 billion at an 11.7 percent margin. Electronic Solutions grew 45 percent to €2.5 billion. |
| RTX US | United States | DUD Score: 14/15 RTX Corporation: The Global Benchmark |
|---|
| $88.6 billionFY2025 Revenue (+10% YoY, +11% organic)$268 billionRecord Year-End Backlog ($161B commercial / $107B defence)$7.9 billionFY2025 Free Cash Flow (+$3.4B YoY) |
| RTX Corporation is the most structurally sophisticated dual-use architecture among large-cap defence primes globally. Its three segments — Collins Aerospace, Pratt and Whitney, and Raytheon — simultaneously serve commercial and defence end-markets with the same or directly derivative technology. FY2025 adjusted sales reached $88.6 billion, up 11 percent organically, with a book-to-bill of 1.56 for the full year and $138 billion in total new awards. Free cash flow came in at $7.9 billion, up $3.4 billion versus the prior year. |
| The record backlog of $268 billion at year-end 2025, up 23 percent year over year, breaks down as $161 billion commercial and $107 billion defence. That commercial-defence split, roughly 60-40, is the most structurally balanced of any large-cap global defence prime and is precisely what earns RTX a Depth score of 5. Pratt and Whitney’s GTF engine powers the Airbus A320neo family, the world’s best-selling commercial narrowbody, and simultaneously powers military trainer aircraft. Collins Aerospace produces avionics for Boeing 737 and 787 commercial aircraft and supplies identical or near-identical systems for military transport and surveillance platforms. For 2026, RTX guided adjusted sales of $92.0 to $93.0 billion. |
| The one dimension holding RTX to 14 out of 15 rather than a perfect score is export control risk. Raytheon’s most sensitive programmes, including Patriot missile defence systems and advanced electronic warfare platforms, face ITAR restrictions that limit the company’s ability to monetise some of its highest-value intellectual property in the fastest-growing international markets. This is a ceiling on addressable market, not a flaw in the underlying technology. Raytheon’s international backlog mix stood at 47 percent at year-end 2025, up three percentage points year over year, suggesting the constraint is being managed actively. |
| RR/ LN | United Kingdom | DUD Score: 14/15 Rolls-Royce Holdings: The Long-Cycle Compounder |
|---|
| £20.2 billionFY2025 Revenue (+13% YoY, approximate)£3.5 billionFY2025 Operating Profit (+40% YoY)17.3%Group Operating Margin (vs 13.8% in FY2024) |
| Rolls-Royce delivered what management described as exceptional results in FY2025, building on the already-record FY2024 turnaround. Underlying operating profit increased to £3.5 billion in 2025 compared with £2.5 billion in 2024, with an operating margin of 17.3 percent versus 13.8 percent the prior year. Free cash flow reached £3.3 billion, up from £2.4 billion, and net cash stood at £1.9 billion at year-end 2025 versus £475 million at end-2024. |
| The dual-use architecture at Rolls-Royce is arguably the most elegant in global Industrials. Civil Aerospace delivered an operating margin of 20.5 percent in FY2025, up from 16.6 percent in FY2024, driven by 8 percent growth in large engine flying hours to 111 percent of 2019 pre-pandemic levels and strong aftermarket performance. Raytheon booked 638 large engine orders in 2025 with a gross book-to-bill of 2.5x. The Defence division delivered a 14.4 percent margin, while Power Systems achieved 17.4 percent, driven by profitable growth in data centre power generation. Three divisions, three end-markets, one core propulsion technology base. |
| The deepest dual-use opportunity, and the one that is priced at close to zero by the market today, is the Small Modular Reactor programme. In 2025, Rolls-Royce SMR was selected as the sole preferred provider for the UK’s first civilian SMR programme. Management guided that the SMR division will be profitable and free cash flow positive by 2030. Rolls-Royce has operated nuclear submarine propulsion systems for the Royal Navy for over six decades. The same engineering capability is being commercialised into civilian energy infrastructure. For the mid-term, management has upgraded targets to operating profit of £4.9 to £5.2 billion and an operating margin of 18 to 20 percent. |
| BA/ LN | United Kingdom | DUD Score: 14/15 BAE Systems: The Backlog Champion |
|---|
| £30.7 billionFY2025 Sales (+10% YoY, constant currency)£83.6 billionRecord Order Backlog (Book-to-Bill 1.2x)£36.8 billionFY2025 Order Intake (+9% YoY) |
| BAE Systems delivered record financial performance in FY2025. Annual sales reached £30.7 billion on a constant-currency basis, a 10 percent year-on-year increase. Underlying EBIT rose 12 percent to £3.32 billion, with a return on sales of 10.8 percent, up 20 basis points from the prior year. Underlying EPS increased 12 percent to 75.2 pence. Free cash flow was strong at £2.16 billion. The company raised its dividend 10 percent to 36.3 pence and guided FY2026 sales growth of 7 to 9 percent with EBIT and EPS growth of 9 to 11 percent. |
| The order backlog swelled to a record £83.6 billion, up £5.8 billion from year-end 2024, representing approximately 2.7 years of funded revenue coverage at current run rates. Order intake for the year reached £36.8 billion, including a landmark £8 billion Typhoon export agreement signed with Turkiye in October 2025 that will deliver approximately £4.6 billion of value to BAE Systems including its MBDA stake. The Electronic Systems and Cyber and Intelligence divisions, where the same sensor fusion, cybersecurity, and data analytics technology serves military intelligence agencies and civilian government infrastructure simultaneously, continue to be the highest-margin segments in the portfolio. |
| BAE’s Depth score of 4 rather than 5 reflects a higher concentration in pure defence hardware, including ships, armoured vehicles, and fighter jets, relative to RTX or Rolls-Royce, where the commercial revenue base is larger and more structurally integrated. However, the 2024 acquisition of Ball Aerospace for $5.55 billion, now operating as the Space and Mission Systems division, has materially repositioned BAE against US space primes, lifting the group’s exposure to space payloads, weather satellites, and intelligence missions with significant commercial applications. The BAE duration score of 5 is simply a mathematical fact. A £83.6 billion backlog at £30.7 billion annual revenue implies 2.7 years of fully booked forward revenue before a single new order is required. |
| LMT US | United States | DUD Score: 14/15 Lockheed Martin: The Scale Argument |
|---|
| $75.0 billionFY2025 Revenue (+6% YoY)$194 billionRecord Year-End Backlog (2.6x revenue)$6.9 billionFY2025 Free Cash Flow (above prior guidance) |
| Lockheed Martin reported FY2025 net sales of $75.0 billion, a 6 percent increase from $71.0 billion in FY2024, with a record year-end backlog of $194 billion representing approximately 2.6x annual revenue. CEO Jim Taiclet described 2025 as a year of unprecedented demand for Lockheed Martin capabilities. The book-to-bill ratio for the full year was 1.2x. Free cash flow of $6.9 billion exceeded prior guidance. For FY2026, management guided revenue in the range of $77.5 to $80.0 billion. |
| The backlog composition of $194 billion across four segments – Aeronautics at $59.4 billion, Missiles and Fire Control at $46.7 billion, Rotary and Mission Systems at $47.7 billion, and Space at $39.8 billion, these shows simultaneous growth across every division. Missiles and Fire Control posted particularly strong double-digit sales gains year over year. The Space segment has significant overlap between defence and commercial satellite programmes, sharing manufacturing, testing, and systems engineering between DoD intelligence community work and commercial satellite builds. |
| The Depth score of 4 rather than 5 reflects a higher concentration in pure defence assets, most notably the F-35 programme which remains the largest single revenue driver and has no civilian commercial derivative. The Duration score of 5, however, is mathematically unimpeachable. A $194 billion backlog against $75.0 billion annual revenue is 2.6 years of fully booked forward revenue. In commercial Industrials, this kind of revenue visibility does not exist. It is a structural advantage unique to the long-cycle defence procurement model and it is why Lockheed’s valuation multiple is more appropriately benchmarked against annuity businesses than against cyclical manufacturers. |
The Dual-Use Dividend is not a theme. It is a structural feature of the current industrial cycle, one that has a specific and quantifiable financial expression, a historical precedent that validates its durability, and a policy framework that is actively accelerating it. For institutional portfolios that still treat defence and industrials as separately screened sectors, the analytical cost of that mental model is compounding quarterly.
| INVESTMENT CONCLUSION |
| Takeaway 01 Screen for DUD, not just defence budget exposure. A company with 100 percent defence revenue and no civilian technology overlap is a government budget cycle trade. A company with high DUD scores is a structural compounder. The market is beginning to price this distinction. Rheinmetall trades at a material premium to pure-play European ammunition manufacturers on the same order-of-magnitude revenue growth rates, precisely because the market is crediting its manufacturing conversion and technology depth as a durable margin advantage rather than a temporary defence windfall. |
| Takeaway 02 The propulsion-to-power corridor is the most underpriced. Of the three technology corridors identified in this paper, the propulsion and advanced energy corridor carries the lowest current market consensus on its dual-use upside and potentially the highest long-cycle return. Rolls-Royce’s SMR programme is the clearest example. It is valued by the market at approximately zero in the current share price, despite representing a potential multi-billion pound revenue stream from intellectual property that the company has already de-risked over six decades of submarine propulsion operations. RTX’s Pratt and Whitney division faces near-term headwinds from GTF engine inspections, but the long-cycle case remains structurally intact: the same core engine technology powering the world’s most fuel-efficient narrowbodies and military trainers simultaneously is one of the most powerful dual-use positions in the sector. |
| Takeaway 03 The backlog multiple is the most underused valuation anchor. Standard industrial valuation methodologies such as EV/EBITDA and price-to-earnings systematically undervalue the earnings durability of long-cycle defence compounders with high DUD scores, because they apply discount rates calibrated to cyclical businesses. The correct anchor is the backlog-to-revenue multiple, which functions as a visibility-adjusted duration score. At a $194 billion backlog against $75 billion annual revenue, Lockheed Martin has 2.6 years of fully booked forward revenue. BAE Systems at £83.6 billion against £30.7 billion is at 2.7x. Rheinmetall at €63.8 billion against €9.9 billion is at 6.4x. These are not defence stocks with cyclical risk. They are annuity businesses that manufacture complex hardware. |
The deeper structural argument, the one that institutional investors should hold beyond the current geopolitical cycle, is this. The defence-industrial boundary was never a law of nature. It was a convenience of procurement bureaucracy, maintained by the administrative separation of defence and civilian budget lines.
That administrative convenience is now collapsing under the weight of its own technological irrelevance. GPS does not know whether it is guiding a missile or a delivery van. A lithium-ion cell does not know whether it is powering a military drone or an electric vehicle. An AI model does not know whether it is analysing satellite imagery for a general or for a commodity trading firm.
The companies that have understood this first, and built their capital allocation, research and development structure, and manufacturing base around it, are the companies that will compound through multiple budget cycles, not just one.
The defence-industrial boundary was never a law of nature. It was a convenience of procurement bureaucracy. That convenience is now over and the investment opportunity is in the companies that understood that first.
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Abhishek Rai is an equity research analyst covering Automobiles, Industrials, and Aerospace & Defense, focused on identifying durable returns and structural risk. His work blends fundamental analysis, earnings modeling, and valuation across companies such as Tesla, Toyota, Cummins, and Siemens Energy.
The dual use dividend refers to the investment advantage created when a company’s technology serves both military and civilian markets, improving revenue resilience, margin durability, and long-term growth potential.
Companies like Rheinmetall, RTX, Rolls-Royce, BAE Systems, and Lockheed Martin are benefiting from the dual use dividend due to their exposure to defence technology, aerospace innovation, advanced manufacturing, and dual-use infrastructure.
Dual use technology is becoming important because innovations in AI, autonomous systems, propulsion, batteries, and advanced materials now serve both defence and commercial industries, creating structural long-term investment opportunities.
