Rolls-Royce soars despite taking axe to dividend
Engineering giant cheers market with upbeat results even as it slashes annual shareholder payouts
ROLLS-ROYCE shareholders could be facing lower payouts for several years, it has emerged, as the company cut its dividend for the first time in more than two decades.
The troubled engineering group’s stock soared yesterday as the company posted forecast-beating annual results and a feared sixth profit warning in two years failed to materialise. The shares climbed by as much as 18pc, before closing up 14.3pc at 606p.
The rise came despite management slashing the dividend, the first cut in 24 years. The second, final payout was halved to 7.1p, taking the full-year payout to 16.4p, compared with 2014’s level of 23.1p. The company also warned of a similar cut at the next half-year stage.
However, chief executive Warren East signalled that the lower dividends may remain in place for longer than just the next two payouts, as he bolsters Rolls’ balance sheet to help his turnaround of the business.
“This is a rebasing of the dividend rather than a pause for 12 months,” he said of the cut, which is also aimed at maintaining Rolls’s credit rating.
Mr East, who only took over the top job in July last year, said reducing the dividend would boost Rolls’s finances by £200m over a year. The company is looking at other cost-cutting plans, aimed at saving between £150m and £200m a year, with the total “adding up to chunky numbers in the round”, he added.
However, Mr East said he “recognised the importance of a healthy dividend to our shareholders” and that Rolls “intends to review the payment so that it will be rebuilt over time to an appropriate level”.
Lower dividends would be a heavy blow for pension funds, which are major investors in Rolls and have stuck with the business as it managed to maintain its payout despite recent global turmoil.
David Smith, finance director, said the company would not need to launch a fundraising, as had been speculated, as Rolls has £3.2bn of cash and access to £1.5bn of credit. However, some analysts were sceptical about the value of the dividend cut, with one calling it “pointless, the saving is peanuts”.
Rolls reported underlying revenue of £13.4bn in 2015, £500m down on the previous year and worse than the City’s consensus forecast of £13.5bn. Pre-tax profit was 12pc lower at £1.4bn, beating expectations. Free cashflow, a crucial measure for Rolls, was also far better than expected at £179m. Analysts had been forecasting this to come in at about negative £50m.
The big plus point for investors was that Rolls left guidance for its 2016 performance unchanged, with no fresh downgrades. It has issued five profit alerts in two years as it battled slowing defence spending, deteriorating global markets, the oil price crash and its own slow reaction to reduced demand for its best-selling engine.