I’m thrilled I bought Rolls-Royce (LSE: RR) shares at the end of last October as my stake has rocketed almost 85% since then.
The FTSE 100-listed aerospace and defence specialist still faces a host of headwinds, though, and I expect plenty of share price volatility ahead. That doesn’t worry me overly. I plan to hold it for a minimum 10 years, and ideally longer, giving it plenty of time to solve its many problems.
A long-term buy and hold
There is one thing I would like to see, though, and sooner rather than later. I primarily buy FTSE 100 stocks for dividend income, but Rolls-Royce doesn’t give me any. Its 10-year track record of making payments ended in 2020, as it fought to protect its balance sheet during the pandemic.
This wasn’t one of the most generous dividends on the index. Its dividend of 4.60p per share yielded just 2% a year, but that’s better than nothing.
The company has been restricted from making payments to shareholders by conditions attached to its loan facilities, but those were thought to expire at the end of 2022. It still has to meet other criteria before restarting payments, but these are not in the public domain.
Hopes that the dividend will be restored this year seem vanishingly thin to me. New CEO Tufan Erginbilgic has branded Rolls-Royce’s performance as “unsustainable” and said that: “Every investment we make, we destroy value”.
His priority is clearly to improve the group’s performance and credit rating, ahead of making distributions to shareholders.
In March, Standard and Poor’s upgraded the company’s long-term debt rating with a positive outlook, but only by one notch, to BB. S&P praised its “strong operating and financial performance in 2022”, when “free operating cash flow turned materially positive”.
S&P said it may raise Rolls-Royce’s rating again in the next 12 to 18 months provided it sees a “positive track record of strong and sustainable free operating cash flow generation comfortably in excess of £600m”. If Rolls-Royce manages that we might see a small dividend. Or we might not.
Still some way to go
Even if the dividend does reappear in 2024, I won’t be too excited. Rolls-Royce launched a £2bn rights issue in 2020 to boost its liquidity. This means the dividend per share is likely to be notably lower than before.
Rolls-Royce places faces plenty of other challenges too. The aerospace and defence industry may be recovering from the pandemic. However, this has been led by demand for narrow body aircraft, where Rolls-Royce does not have have a significant market share.
Supply chain challenges remain, particularly among semi-conductors and forgings, while it has been hit by higher staffing and energy costs.
The bulk of its revenues come from long-term maintenance contracts attached to engine sales. This demands a hefty upfront investment followed by a slow wait for a return.
I’ve enjoyed a short-term kick from my Rolls-Royce shares but I’m taking a long-term view of a company that still faces a slow, hard fight for respectability. I’m afraid that applies to its dividend, too.
