Why is the Rolls-Royce yield zero?

With the Rolls-Royce yield at zero, our writer explains what has happened to the engine maker’s dividends — and whether payouts could return.

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Rolls-Royce's business aviation engine, the Pearl 700

Image source: Rolls-Royce plc

With its large customer base and iconic brand, aeronautical engineer Rolls-Royce (LSE: RR) is a well-known name in the FTSE 100 index of leading shares. Despite that, the Rolls-Royce yield is zero.

Below I explain why that is — and whether Rolls-Royce might offer me a more attractive dividend yield in future.

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Dividend history

The company has paid dividends to shareholders in the past. For its 2018 year, it paid 11.7p per share in dividends. That was flat – the company had paid the same the previous year.

If the company was to pay 11.7p per share in dividends at the current share price, that would make for a yield of 10%. That certainly sounds attractive to me. But that will not be happening any time soon. The company cancelled its final dividend for 2019 (that was scheduled for payment in 2020). It has not paid out since.

Why Rolls-Royce stopped its dividend payment

The company suspended its dividend after the business went into a tailspin. A key part of the Rolls-Royce business is selling and servicing engines for commercial aircraft. When the pandemic hurt demand for flying, that business saw revenues plunge. The company introduced a programme of cost cuts. But until aviation demand gets close to its old levels, I expect profits will remain sharply lower than before.

On top of that, to shore up its liquidity during the downturn, the engineer borrowed money. As part of the loan terms, Rolls-Royce is restricted from declaring or paying dividends to shareholders until the end of this year at the earliest. Those restrictions are due to change next year. But even then, the company will need to meet certain conditions before paying any dividends.

Where next for the Rolls-Royce yield

So there will definitely not be a dividend in 2022. What about next year?

In principle, the company may return to paying dividends if it meets its debt conditions and business results allow for a payout. From a positive perspective, the company’s business is showing strong signs of operational improvement as well as demand recovery. It has hit its target of returning to positive free cash flow. If it can sustain that, Rolls-Royce will reduce the risk that liquidity concerns force it to dilute shareholders in a rights issue, as it did in 2020. I also think resuming the dividend would be a sign of confidence, even if it were to begin at a token level far below the former dividend.

More bearishly, though, the business case for restoring the dividend in the next few years looks weak to me. The company has been through a painful period of cost cutting. Its finances right now are geared more towards short-term survival than medium-term growth. Civil aviation demand remains lower than it was before the pandemic. That could be the case for some years to come. Shifting rules may put many passengers off committing to travel plans. Even when the business does start to perform strongly again, its priority could be restoring its balance sheet. That may mean paying creditors and building up a cash reserve, not necessarily funding dividends. From an income perspective, I am not tempted to add the zero-yielding Rolls-Royce to my portfolio any time soon.

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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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