U.S. defense shares shrug off Pentagon cuts

* S&P defense index closes 1 percent higher

* Oshkosh, Aerovironment shares hit

* Bigger companies use high dividends as offset

By Andrea Shalal-Esa

WASHINGTON, Feb 13 (Reuters) - Shares in U.S. defense companies closed slightly higher on Monday, buoyed by aggressive dividend policies that helped offset the Pentagon's detailed breakdown of how it will implement $487 billion in spending cuts over the next decade.

President Barack Obama on Monday submitted a request to Congress that calls for a base Pentagon budget of $525.4 billion, about 1 percent less than approved in 2012.

The Pentagon's proposed budget included about $75 billion in reductions to existing weapons programs over the next five years, including a restructuring of the Lockheed Martin Corp F-35 Joint Strike Fighter that will defer production of 179 planes for savings of $15.1 billion.

Lockheed shares closed 72 cents or 0.82 percent higher at $88.23. The company announced last month that it would pay a dividend of $1 per share for the first quarter of 2012.

The budget plan also included delays in several shipbuilding programs that accounted for savings of $13.1 billion, and terminates other programs valued at $9.6 billion over the 2013-2017 period.

Wall Street analysts and congressional aides took the detailed news in stride, relieved that no major surprises emerged in the Pentagon budget plan.

The S&P defense and aerospace stock index closed 1 percent higher.

Defense Secretary Leon Panetta had flagged most of the proposed terminations at two news conferences last month, which helped Congress and stock market investors digest the programmatic cuts.

"It's been sort of a drip, drip, drip for weeks," said one congressional aide. "The big question is going to be how President Obama handles sequestration."

The Pentagon budget does not make any provision for another $500 billion in mandatory defense cuts or "sequestration" that will take effect in January 2013, unless lawmakers act to reverse the move.

Credit Suisse said further defense budget cuts were possible and likely, either from future sequestration moves or other budget negotiations. But it said such cuts were unlikely to occur before the 2012 presidential election.

Byron Callan, analyst for Capital Alpha Partners, said the biggest defense firms were largely unaffected by Monday's budget news since it had been telegraphed in advance, but also because those companies' dividend payouts were quite generous.

He noted that some smaller companies such as Oshkosh Corp took a big hit due to larger-than-expected cuts in their program to build heavy- and medium-weight trucks for the Army. Oshkosh shares closed $1.24 or 5 percent lower at $23.68 on the New York Stock Exchange.

Shares in Aerovironment Inc, which makes unmanned vehicles, fell sharply on news that the Army was scaling back orders of the company's Raven unmanned system by over a third. Its shares closed 5.22 percent or $1.60 lower at $29.04.

Another surprise in the budget was a move by the Navy to postpone production of 10 Boeing P-8A maritime surveillance planes until fiscal 2018 and beyond. Boeing shares closed 10 cents lower at $74.85.

Callan said companies that provide services to the U.S. military could face increasing pressure, given comments from top defense officials about the need to crack down on inefficiencies and reduce spending on information technology.

Lockheed, Boeing and Northrop Grumman Corp all have a big stake in that area, but it would be smaller, pure play companies such as CACI, Exelis, Science Applications International and Booz Allen Hamilton that would be primarily affected, he said.