BAE aims to offset profits slump with £1bn buyback

 

The defence giant BAE Systems moved to ease investor concerns over its slowing finances and failed mega-merger with Airbus owner Eads by kicking off a £1bn share buyback.

The announcement came as BAE revealed that pre-tax profits had slumped 6 per cent and outlined the effect of the United States and UK cutting military spending.

Its finance director Peter Lynas confirmed that the company started repurchasing its own stock, and will continue to do so for three years, prompting the shares to jump 13.7p to 345.9p and leaving them at the top of the FTSE 100 index.

Its chief executive Ian King played down fears the massive defence cuts in the US, known as sequestration, will hurt the company, even though BAE was so keen to merge with Eads last year to make up for falling military budgets. He said that even in a worst-case scenario, BAE finances would only be hurt by £1bn as a result of sequestration, a light number given that revenue was £17.8bn last year and almost £19.2bn in 2011.

Mr King said: "The US business is 40 per cent of our company. If sequestration happens to the full extent … we believe that we could manage our business."

He added that the American cuts would not significantly harm future dividends to shareholders. Earlier this week, BAE had said 3,500 jobs were at risk in the US because of the cuts.

The perennially strong dividend, which was up 4 per cent to 19.5p in 2012, makes the company a favourite of institutional investors, many of whom were prepared to vote against the Eads deal to ensure they still received the payout. That deal was widely viewed as vital to the company's financial strength in the coming years, as Eads' civil aviation sales would balance out the defence cuts in the UK and across the Atlantic.

Mr King said: "You've got to move on. We both [BAE and Eads] walked away with our heads held high."

The company said talks with Saudi Arabia over the pricing of its contract to supply the Gulf state with Typhoon aircraft were ongoing, and that there would be an increase of 3p in underlying earnings per share should the negotiations conclude this year.

Analysts from Jefferies said they believed BAE "would not have launched the buyback if it doubted the negotiations with Saudi will not reach a satisfactory conclusion in a reasonably timely manner".

BAE also announced a £2.7bn deal with Legal & General to protect its pension scheme against financial difficulty. The tie-up in effect insures the final salary scheme against the financial risk of its 31,000 current pensioners living longer than expected. Experts say it is the largest deal of its kind.

One of the major decisions facing BAE's management over the coming months is confirming the closure of one of its shipyards, most likely the historic home of the Royal Navy, Portsmouth. In its results statement, BAE said: "Discussions continue with the UK Government to determine how best to sustain the capability to deliver complex warships in the UK in the future."

BAE's earnings per share were down, which is bad news for Messrs King and Lynas, as it means they will miss out on a large chunk of their bonuses.

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