Cost-cutting, share buybacks buoy U.S. defense profits

Wed Apr 23, 2014 12:43pm EDT
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By Andrea Shalal

WASHINGTON (Reuters) - The biggest U.S. weapons makers posted higher profits this week and raised their forecasts for 2014 earnings, sending shares higher despite cuts in military spending that have weakened revenues.

The Dow Jones index that tracks the 10 biggest aerospace and defense companies rose 1.75 percent, driven by gains in shares of Lockheed Martin Corp, General Dynamics Corp, and Northrop Grumman Corp, which all reported higher profit and earnings per share this week.

Boeing Co saw a drop in its defense earnings and revenues, but still beat expectations.

Weapons makers are benefitting from workforce reductions and other cost-cutting measures that began around 2007, as well as efforts to return cash to shareholders through stock buybacks and strong dividends, said defense consultant Loren Thompson.

"The gradual decline in military spending has given the companies fewer opportunities to invest in new programs, so they

are returning their cash flow to shareholders," said Thompson, who runs the Virginia-based Lexington Institute.

He said the crisis in Ukraine and other emerging threats could strengthen demand for military equipment in the United States and overseas, and help stave off an expected decline in defense shares as spending cuts further erode revenues.

Lockheed shares were trading up 3.1 percent at $161.52 after Australia announced plans to buy 58 more of the company's F-35 fighter jets in coming years.   Continued...

Workers can be seen on the moving line and forward fuselage assembly areas for the F-35 Joint Strike Fighter at Lockheed Martin Corp's factory located in Fort Worth, Texas in this October 13, 2011 handout photo provided by Lockheed Martin. REUTERS/Lockheed Martin/Randy A. Crites/Handout