By Ann Keeton
CHICAGO (Dow Jones) – Northrop Grumman Corp. (NOC) said the $1.65 billion sale of its advisory services business will be neutral to earnings in 2010.

The Los Angeles defense contractor plans to use the proceeds of the all-cash deal to buy back stock. After taxes, Northrop will use net proceeds of $1.1 billion to begin buying back shares in the open market, James Palmer, chief financial officer, said during a conference call Monday.

The sale was announced Sunday, after Northrop worked for the past year to find the right buyer for the unit that consults with defense and civil government agencies. Buyers for the TASC, Inc., business include investors General Atlantic LLC and Kohlberg Kravis Roberts % Co. L.P.

In January, Northrop streamlined its business, combining its Information Technology and Mission Systems units to form Information systems. TASC was part of the business.

A new U.S. law this year to address conflicts of interest on government contracts made it necessary to exit the advisory business as quickly as possible, Palmer said. He said Northrop Grumman continues regularly to review the possible sale of some businesses.

Shares traded recently at $53.73, up $1.36, or 2.58%. Early Monday, analyst Howard Rubel at Jefferies & Co. upgraded the shares to buy from hold. “We see Northrop Grumman as setting itself apart with this transaction,” with “an understanding of and capability to find value for shareholders in a changing market for defense oriented suppliers,” he wrote. He said the advisory business represents about 5% of annual sales. Jefferies expects Northrop to earn $5.20 per share this year, and $5.45 per share in 2010.

Investors have worried that defense contractors will have trouble growing amid belt-tightening at the Pentagon, with share prices reflecting that concern. Still, analysts said Northrop appeared to get a fair price for TASC. For bondholders, “an asset sale that reduces earnings, lessens diversification, and increases share buybacks cannot be positive,” said Carol Levenson at Gimme Credit. “But it’s not hugely negative either, given the size and Northrop’s strong credit profile and financial flexibility.”

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