Despite its full-year results revealing a combination of falling profits and sales and a bleak outlook on both sides of the Atlantic, shares in BAE Systems (BA.) achieved lift-off. The stock ascended 4.7% to 347.8p as investors cheered a 4% increase in the dividend to 19.5p and a three-year share buyback programme of up to £1 billion.


The £11.2 billion cap has endured a difficult five years which have seen the shares lose nearly a quarter of their value, dogged by spending cuts, corruption scandals and the collapse of a planned merger with European defence firm EADS last year, but it has consistently raised its payout through this period. Over the last half decade the dividend has increased by 34% which represents a compound annual growth rate (CAGR) of 6.1%.


Europe's largest defence contractor saw earnings before interest, tax and amortisation (EBITA) fall 6% year-on-year to £1.895 billion in 2012, just light of a consensus forecast for £1.92 billion, and sales fall 7% to £17.83 billion. In part the weak profits were attributed to contract delays in the Middle East, where a deal to supply Saudi Arabia with 72 Typhoon jet fighters has hit trouble following disagreements over the final contract price.


More encouraging was an 8% increase in the order backlog to £42.4 billion, a substantial increase in operating cashflow to £2.7 billion and a swing from net debt of £1.4 billion in 2011 to net cash of £387 million.


Around 40% of BAE's revenue comes from North America and it could feel a significant impact from 'sequestration' – the automatic 'across-the-board' spending cuts which are due to come into force in the US on 1 March. This could see $46 billion trimmed from the US military budget over the next seven months. The company says it 'bases plans on conservative assumptions and continues to address its cost base accordingly.'


Stockbroker Investec, which has a 'hold' rating and 325p price target, notes 'positives' in the results but in a cautionary vein adds: 'The US problems are looming ever larger. If sequestration does happen, then it is very difficult to gauge the full impact on our forecasts for BAE and the other UK defence stocks.'

Issue Date: 21 Feb 2013