BAE plans £1 billion buyback boost

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

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

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 14.3p to 346.5p and leaving them at the top of the FTSE 100 index.

Chief executive Ian King, pictured, 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 £1 billion as a result of sequestration, a light number given that revenue was £17.8 billion last year and almost £19.2 billion in 2011.

King said: “The US business is 40% 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 3500 jobs were at risk in the US because of the cuts.

The perennially strong dividend, which was up 4% 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 both the UK and across the Pond. 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 still 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”.