Rolls-Royce Holding PLC Halves Its Dividend, But The Shares Soar By 18%

Is it time to get back into Rolls-Royce Holding PLC (LON: RR)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s been a horrible year for Rolls-Royce (LSE: RR) shareholders, who were looking at a 42% price fall over 12 months, to 530p, as of close of play on Thursday and a drop of 60% since the shares’ recent high in January 2014.

The collapse has followed a series of profit warnings that have put the firm’s dividend under threat, and it was pretty much certain that the final payout for the year ended December 2015 would be cut — we were warned to expect it back in November. That’s now happened as Rolls-Royce has reported a 12% drop in underlying pre-tax profit, to £1,432m (with a figure of £1,355m before exceptionals, towards the bottom end of previous guidance).

Cash cut

The final payment was slashed by 50%, to 7.1p per share, taking the year’s total to 16.37p per share. Next year’s interim and final dividends are planned to be similarly cut, so for 2016 we should be seeing a total dividend of around 11.5p. That would yield only around 2%, but chief executive Warren East did say that “we intend to review the payment so that it will be rebuilt over time to an appropriate level” and commented on the board’s “confidence in the strong future cash generation of the business“.

Rolls-Royce also reiterated its plan to cut costs by around £150m to £200m per year, which includes the loss of a number of management jobs, and told us it has already identified around 50% of its targeted savings. Does this all mean the shares are good to get back into now?

Well, many were fearing a further profits warning, and there were even fears of a new share issue to raise capital. When both of those failed to materialise, investors seemed happy and pushed the share price up 18% by midday, to 625p.

I’ve no real doubt about the profitability of Rolls-Royce in the long term, but I’d still be cautious about investing in the company right now. Prior to the results, forecasts for 2016 were suggesting a further fall in EPS of more than 40%. With the company’s cost-cutting measures looking strong, I think things could turn out better than that, but we’re still looking at P/E multiples of 16 to 17 or so.

There are better bargains

That’s not bargain territory and prices the shares for an eventual recovery in earnings — and we’re going into a 2016 which, in the words of Mr East, “will be a challenging year as we start to transition products and sustain investment in Civil Aerospace and tackle weak offshore markets in Marine“.

If you’re looking at Rolls-Royce with a 10-year horizon (which we all should, really), then I reckon it’s going to be a solid investment — and dividends will almost certainly get back up to sustainably better levels. But with the irrationality of the latest FTSE sell-off, I just see better bargains out there in the shape of great companies on very low P/E ratings and with attractive dividends today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »