ROLLS-ROYCE slashed its dividend by half yesterday – the first cut for a quarter of a century – but shares in the aero-engine maker surged 14 per cent on investor relief there was no rescue rights issue.
Shareholders were also cheered that although Rolls’ profits tumbled 12 per cent to £1.4 billion in 2015 the slide was not even worse. The business has been hit by civil aerospace cuts and falling commodity prices that have impacted output at its marine division, which supplies the oil industry.
Rolls said it would pay shareholders a final dividend of 7.1p compared with the 14.1p it paid out in the previous year. It has said it will also halve the interim divi for 2016.
However, fears that the company’s balance sheet could worsen were allayed. David Smith, Rolls’ chief financial officer (CFO), said: “Our view is we don’t need to look at a rights issue.”City analysts said that after three profit warnings from the group last year, with new chief executive Warren East arriving in July, there had been a more confident tone to yesterday’s statement accompanying the results.
East said that Rolls acknowledged the importance of paying a “healthy” dividend and the payout would be reviewed for 2016’s final payment.
The CFO, meanwhile, hinted the worst was behind the company.
“In my view, 2016 is where we start transitioning from dealing with a lot of legacy issues to getting ahead of the curve,” Smith said.
Shares in the group closed up 76p at 606p. East had said in November that further profit warnings could not be ruled out, but yesterday he stuck to previous 2016 guidance, which is for profits to be about £650m lower than 2015. Analyst expectations for pre-tax profit this year are about £673m.
The slowdown in Asian economies has hit demand for servicing older aircraft engines, a key Rolls business. Its marine business has also been impacted by energy customers cancelling orders for power systems after the plunge in the oil price.
East’s turnaround plan aims to save £150m-£200m a year, including shaking out top management, with some departures having been announced already.
Rolls said that more management jobs would be cut on top of a 20 per cent reduction in the top two layers already made since November.
The jump in Rolls’ shares was the biggest daily gain since 2004, but comes after the stock had nearly halved in the previous ten months.
Sandy Morris, an analyst with broker Jefferies, said: “We remain optimistic 2016 will show momentum is building, the hurdles are being overcome and, to be blunt, that Rolls-Royce management has control and is growing in confidence.”
But Hargreaves Lansdown head of research Steve Clayton was less convinced. “It is too early to say that signs of recovery are visible. (It) is set to be a long haul.”