BAE cheers investors with dividend rise and share buyback plan

The company, whose proposed merger with European aerospace firm EADS collapsed last October, said growth in 2013 would likely come from outside its home markets in Britain and the United States, where it said the overall outlook was “constrained”.

“There are a lot of green shoots in this organisation which provides you with confidence that resilience is there and that’s another reason why we have confidence in the company to do a share buyback,” chief executive Ian King said, citing BAE’s efforts to slash costs and increase overseas sales.

“A £1bn share buyback... on top of one of the highest dividend yields in the market can only be interpreted as a very profound and positive signal about management’s belief in the robustness of the business,” said Jefferies analyst Sandy Morris.

“And for them to do that whilst everyone probably has been concerned about and most likely exaggerating the potential impact of US spending cuts is clearly going to catch the market on the hop and pleasantly surprise it.”

Europe’s largest defence contractor said it would immediately start buying back shares over the next three years and raised its dividend by 4 per cent to 19.5p a share.

It was going ahead with the buyback even though it said full implementation still hinged on the resolution of current discussions with Saudi Arabia over the pricing of its latest Salem contract to supply the Gulf state with Typhoon aircraft.

Meanwhile, King said the company was “absolutely not” in discussions with EADS about reviving the proposed merger and that BAE had moved on to focus on running its business.

The company reported a 6.4 per cent fall in earnings before interest, tax and amortisation (EBITA) to £1.895bn in 2012, whereas most analysts had expected a result of around £1.85-£1.87bn.

The fall in profits was led by reduced business in its US division, which accounted for 40 per cent of its 2012 sales, due to defence budget pressures and reduced activity in support of deployed operations in Iraq and Afghanistan.

But BAE said that while the outlook for the US and UK remained bleak it was encouraged by growth in its international business, where combat jet deals worth billions of dollars were recently signed with Oman and Korea.

“Subject to near-term uncertainties relating to US defence budgets, modest growth in underlying earnings per share is anticipated for 2013,” it said in the statement.

The company has been pressured by shrinking military budgets in the US and Britain.