LONDON BAE Systems (BAES.L) posted a smaller than expected fall in underlying profits on Thursday and cheered investors with a dividend boost and 1 billion-pound ($1.5 billion) share buyback plan due to the strength of its overseas arms sales.
The company, whose proposed merger with European aerospace firm EADS EAD.PA 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 buy back," Chief Executive Ian King told reporters, citing BAE's efforts to slash costs and increase overseas sales.
"A 1 billion-pound share buy back ... 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 U.S. spending cuts is clearly going to catch the market on the hop and pleasantly surprise it."
Shares in BAE were up 4.9 percent at 348.5 pence at 1230 GMT, valuing the company at 11.3 billion pounds.
Europe's largest defence contractor, said it would immediately start buying back shares over the next three years and raised its dividend by 4 percent to 19.5 pence 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 percent fall in earnings before interest, tax and amortisation (EBITA) to 1.895 billion pounds in 2012, whereas most analysts contacted by Reuters had expected a result of around 1.85-1.87 billion pounds.
The fall in profits was led by reduced business in its U.S. division, which accounted for 40 percent 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 U.S. 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 U.S. 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 United States and Britain where governments have been trying to reel in large budget deficits.
BAE and its U.S. rivals such as Lockheed Martin (LMT.N) and Northrop Grumman (NOC.N) have also warned that billions of dollars in spending cuts could hit the U.S. military budget in a process known as "sequestration".
BAE's non-U.S. and UK order intake rose to 11.2 billion pounds over the year from 4.8 billion pounds in 2011, reflecting the group's efforts to pursue business overseas in the Middle East region and India.
King said he expects sequestration to hit BAE's revenues by a maximum of 1 billion pounds in 2013 but that he expected international deals to compensate for this as the order book crystallises out in actual revenue.
BAE also said that 3,600 jobs in its U.S. ship repair business was under threat after was notified by the U.S. Navy that it was considering the potential to cancel, defer or revise maintenance plans on thirteen ships.
BAE has begun the process to find a new chairman to replace Dick Olver, who is due to retire in May 2014, King said.
($1=0.6535 British pounds)
(Editing by Greg Mahlich)