BAE Systems slipped to a one-month low on Wednesday amid speculation that its dividend might be at risk.

A rising pensions deficit and growing political sensitivity about defence exports to Saudi Arabia raise red flags over BAE’s cash flow, Barclays analysts argued. Cash cover for the payout is already weak, averaging just 1.1 times net profit over the past six years, they said.

Barclays forecast AE’s pension fund to hit £6.3bn by the year end, making it the largest by company market value in the FTSE 100. And, with a triennial pension review beginning in early 2017, annual cash contributions look likely to jump from £300m to at least £700m, Barclays forecast.

While the pensions regulator might make allowances where top-up costs might jeopardise UK investment and jobs, companies paying large dividends should expect no leniency in the wake of the BHS scandal, it said.

Barclays also raised concerns about a lack of orders and upfront payments from Saudi Arabia, which it estimated provides more than a quarter of BAE’s group profit.

Two House of Commons Select Committees last week called for curbs on arms exports to Saudi Arabia pending a UN-led inquiry into alleged human rights violations.

BAE closed 2 per cent lower at 533.5p in a flat wider market. The FTSE 100 ended 3.98 points higher at 6,834.77.

Legal & General led the FTSE gainers, up 3.7 per cent to 222.6p. At an investor dinner this week, L&G chief executive Nigel Wilson set out a plan to ease concerns about the insurer’s capital and balance sheet strength, which he argued is undervalued by Solvency II measures.

Among the options discussed were deeper disclosure about investment risk and, potentially, a return to reporting L&G’s embedded value.

Barclays took on 3.1 per cent to 171.6p after HSBC turned positive.

Management wants to withdraw from non-core assets including Barclays Africa by the end of the year, HSBC noted. Removing the negative income and expenses and transferring a residual £8bn of tangible equity to the core has the potential to boost Barclays’ market value by 40 per cent, which is likely to eclipse the impact on sustainable returns from low interest rates, the broker argued.

Ocado — the London market’s most-shorted stock — lost 5.3 per cent to 254.5p.

Deutsche Bank downgraded to “sell” in the wake of last week’s margin warning with the broker highlighting that Ocado had probably taken customers from Tesco, which has seen its online growth slow rapidly after it imposed a higher minimum basket size.

“That Ocado cannot deliver profit improvement in this environment confirms our long-held view about the challenge of profitably growing the market with incrementally smaller baskets under the Ocado model,” it said.

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