Rolls-Royce shares jump 15 percent despite dividend cut
Rolls-Royce Holdings Plc shares surged the most in 14 years as investors shrugged off cutting the dividend in half and instead cheered restructuring efforts that ended a run of profit warnings.
The stock jumped as much as 16 percent, the biggest intra-day gain since September 2002, as cost cutting that started last year provided welcome consistency for the embattled engine maker. After five profit warnings in two years, RollsRoyce stuck to its November forecast for a 650 million-pound ($943 million) hit to 2016 earnings from sluggish sales of marine turbines and slumping demand for older wide-body jets.
The stable forecast "should help stop the rot in sentiment," Sandy Morris, an analyst with Jefferies International Ltd. said in a note. Rolls-Royce plunged into crisis as the tumbling oil price undermines sales of engines it makes for specialist offshore vessels just as demand for corporate and regional jets slumps and some of the bigger planes it powers reach retirement age. Those issues have given new Chief Executive Officer Warren East a free hand to make sweeping changes.
"I do feel that we're on firmer ground than I did last year," said East, who assumed the top post at Rolls-Royce in July. "Fixing the issues is a long-term program. You get through most of it quite quickly, and yes, we're feeling more confidence in that, but no, the work is not complete by any means." The first cut to RollsRoyce's annual dividend since 1992 helps Rolls-Royce preserve cash and protect its credit rating. Restructuring charges this year may reach 100 million pounds, Chief Executive Officer Warren East said, adding that "further reductions" will be necessary after already cutting about 50 of the top 200 managers.
He also said the company is focused on "execution and transformation" rather seeking out partners, adding that the lowered dividend amounts to an effective "rebasing" and the payout probably won't rebound immediately to its former level. The dividend cut and other steps to bolster Rolls-Royce's cash position means a rights issue isn't in the works at the moment, Chief Financial Officer David Smith said.
The final payout for 2015 will be reduced to 7.1 pence per share from 14.1 pence and the interim payment for this year will also be cut by 50 percent, the London-based manufacturer said Friday. The reduced payout places the engineer alongside U.K. companies including grocers Tesco Plc and J Sainsbury Plc and platinum-miner Anglo American Plc in lowering dividends.
Underlying profit for last year fell 12 percent at constant exchange rates to 1.43 billion pounds, while sales fell 1 percent to 13.4 billion pounds. Rolls-Royce's pretax profit for 2015 was within a range of 1.325 billion pounds to 1.475 billion pounds forecast in November. The company's shares climbed as high as 614 pence and were up 14 percent to 602 pence at 9:23 a.m. in London. Prior to Friday's release, Rolls's share price had fallen 7.8 percent this year and 39 percent since East took over in July.