By Sarah Young
LONDON (Reuters) - Rolls-Royce shares jumped 7 percent on Thursday after the British aero-engine maker decided to buy back shares worth 1 billion pounds ($1.69 billion) instead of making any major acquisitions.
The company said it was on track to return to earnings growth next year, reassuring investors whose confidence was shaken by a cut in profit guidance in February and an engine order cancellation this month.
Rolls-Royce shares climbed to 1,076 pence, their highest in over two months, leading Britain's benchmark FTSE 100 index. The stock had lost 17 percent of its value over the past six months.
The buyback, equivalent to about 5 percent of the Rolls-Royce's 19-billion-pound market capitalisation, will be funded partly by proceeds from the 785-million-pound disposal of its gas turbine unit to German conglomerate Siemens AG, agreed in May.
"As no material acquisitions are planned, and reflecting the strength of our balance sheet, we will return the proceeds of the energy sale to our shareholders," Chief Executive John Rishton said ahead of an investor day event on Thursday.
Rolls-Royce had last year considered a bid for Finnish ship and power plant engine maker Wartsila and analysts had said such a deal could re-emerge. Shares in that company, currently worth about 8 billion euros, traded down 3 percent.
Rolls-Royce had looked at buying Wartsila as a way to strengthen its Marine engine business, but the idea left some investors wondering whether the company was spending indiscriminately in the pursuit of growth.
The share buyback "shows they 'get' how much the Wartsila story frightened investors", said Edison analyst Sash Tusa.
In further evidence of a more rigourous approach to spending, Rolls-Royce said it would reduce group capital expenditure to 4 percent of underlying revenue over the next three to five years from 4.9 percent at the end of 2013.
"The buyback is good news because it shows the company is committing itself to very tight capital discipline, prioritising rewarding shareholders ahead of expanding the footprint. This is exactly the message we were looking for after a challenging six months," said Espirito Santo analyst Edward Stacey.
Rolls-Royce joins a number of British blue-chip companies signalling a focus on returning cash to shareholders.
Oil companies BP and Shell have this year said they will rein in spending and return spare cash. Vodafone in February directed the $24 billion made on the sale of its stake in U.S. operator Verizon Wireless back to investors.
Analysts expect Rolls-Royce to post flat pretax profit of 1.7 billion pounds for 2014. Before February's warning, they had expected pretax profit growth of 8 percent this year.
The company reiterated earlier guidance that it was on track to return to growth in 2015, when it is due to ramp up production of aero engines.
The company has enjoyed strong profits and revenue growth for 11 years as soaring demand for more fuel-efficient engines for passenger planes made by Airbus and Boeing boosted its civil aerospace unit, which generates about half of its sales.
($1 = 0.5904 British Pounds)
(Reporting by Sarah Young; editing by James Davey and Tom Pfeiffer)