Last updated: February 21, 2013 10:52 pm

BAE launches £1bn share buyback

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BAE Systems, the world’s third-biggest defence contractor, has said it will buy back shares worth £1bn over three years as it seeks to restore investor confidence in the face of sharp cuts to western military budgets.

Shares in the group, which have hovered at about £3.50 since the financial crisis began five years ago, rose as much as 6 per cent on the announcement, which came just hours after BAE warned 3,500 US staff that they could lose their jobs.

The arms supplier is grappling with a decline in defence spending in the US – the world’s biggest military spender – as a result of austerity budgets and the withdrawal from Iraq and Afghanistan. This has depressed land vehicle and armaments sales in the US, which are down 60 per cent since 2008.

In its full-year results on Thursday, BAE said pre-tax profits fell 6 per cent to £1.37bn in 2012, while sales slumped 7 per cent to £17.83bn. The decline was led by the group’s US division, which accounts for 40 per cent of revenues.

“Everything BAE does is aimed at mitigating the strong budgetary pressures,” said Roger Johnston, director of Edison Investment Research. “They have managed the headwinds by keeping costs under control and by expanding in international markets. But the share price has remained stubbornly flat. The share buyback is a further attempt to address that.”

However, Nick Cunningham, analyst at Agency Partners, said it is common practice throughout the industry. “With the industry in a down cycle, it’s a no-brainer to buy your own stock.” He noted that Lockheed Martin, the rival US defence manufacturer, has a policy of spending half of its free cash flow on dividends or buybacks.

BAE was left reeling in October after the collapse of a planned £30bn merger with EADS, the Franco-German maker of Airbus. The tie-up would have broadened BAE’s business into civil aviation and created the world’s largest defence, security and aerospace group.

Ian King, BAE’s chief executive dismissed suggestions that the talks would be revived. “Absolutely not. The business is stronger than it was at the time of the merger; the company has moved on,” he said.

Record deal on pension de-risking

The market for financial institutions assuming the risk of pensioners living longer than expected has received a boost after BAE Systems trustees agreed to the biggest deal yet in the UK, writes Alistair Gray.

Legal & General is assuming the so-called longevity risk, covering 31,000 BAE retirees and £3.2bn of liabilities, for an undisclosed premium. The life insurer is in turn transferring 70 per cent of its exposure to the reinsurer Hannover Re.

The BAE pension plan joins those at such companies as British Airways, Rolls-Royce and ITV, which have entered into such arrangements in the belief that banks and insurers can better manage the uncertainty.

The market for pension de-risking arrangements has been quiet in recent months. Low bond yields have pushed up the costs of bulk annuity deals and banks have stopped writing longevity swaps.

But consultants said the BAE deal showed schemes were still keen on offloading their risks and expected more transactions to come.

BAE has no plans to change strategy, he added. The group, which sold its 20 per cent stake in Airbus six years ago, has been competing for contracts in Australia, Brazil, Saudi Arabia and India, where military spending is expected to grow substantially. Its order book outside the US and UK more than doubled from £4.8bn at the end of 2011 to £11.2bn by the end of last year.

Key wins include a £2.5bn agreement to supply 12 Typhoon fighter jets and eight Hawk aircraft to Oman last December. Saudi Arabia has also become a key market for the company, accounting for 15 per cent of sales. The full completion of the share buyback has been made conditional on resolving the price for the next tranche of Typhoons for the Saudi government.

In the UK, where BAE makes nuclear-powered submarines, aircraft carriers and military jets, the company is still weighing plans to close one of three naval shipyards, two on the Clyde and one in Portsmouth. The group’s £5bn contract to build two warships is coming to an end, with the aircraft carriers due to be launched within the next six years and much of the work expected to be completed sooner.

The company, one of Britain’s biggest manufacturing employers, has already shrunk its workforce from 16,000 to13,350 over the past two years as a result of the government’s pledge in 2010 to slash military spending by 8 per cent by 2014.

Mr King did not rule out further job losses: ”We are planning far ahead and the impact on employment will be made in that context,” he said. He said the company was involved in close negotiations with the government.

BAE proposed a final dividend of 11.7p per share, boosting the full year payout 4 per cent to 19.5p.

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