Over the past 12 months, Rolls-Royce (LSE:RR) shares are up 90%. This makes it one of the best-performing stocks on the FTSE 100. But the vast majority of these gains came between October and February. In recent months the stock has been range-bound.
I’m a shareholder in Rolls-Royce, and I’d love to see the stock break through the 155p barrier. But how long will I have to wait? Let’s explore.
More evidence required
Rolls is recovering from one of the biggest demand shocks imaginable — the pandemic. In February, the stock soared on better-than-expected earnings. We received more good news in May. The company said it would be holding its guidance.
“Our financial performance is in line with our expectations at the time of the full year results on 23 February“, management said. But the share price didn’t respond.
The company recently reported its largest ever order for Trent XWB-97 engines. And we know that the power systems and defence divisions are performing well. We can also complement this with all the positive data coming out of the civil aviation market.
However, I think investors need more convincing. Potential upside is inferred by a strong market, and the fact the stock is down 52% over five years. But the next couple of earnings reports will be key. More evidence is required to break out of range.
The dividend
Not all companies pay a dividend. Some investors are happy to benefit from a form of compound returns whereby the company reinvests their profits. Just look at the success of Apple and Amazon, among others — they’re investor favourites.
But for a company to pay a dividend, it essentially needs to be making money. It basically gives investors a cut of the money earned. Of course, as noted above, some firms reinvest rather than paying shareholders.
Rolls hasn’t paid a dividend since 2019. That’s a long time for shareholders to hang on. And under the terms of a government-backed loan taken out during the pandemic, the company couldn’t pay a dividend. This has now been paid off, meaning there’s no legally binding reason not to pay a dividend.
But is a dividend affordable yet? That’s the big question. With 82bn shares, even a 1p dividend would cost Rolls £82m.
Rolls expects to generate underlying operating profits of £0.8bn-£1bn and free cash flow of £0.6bn-£0.8bn this year. But this isn’t the same as profit, which indicates the money left over after all expenses including, in Rolls’s case, interest on debt — net debt stands at £3.3bn.
In my view, it’s entirely possible that management will prioritise the health of the company over rewarding shareholders. But a dividend announcement could help the stock break out.
As noted, I own Rolls stock, but I’m not buying more right now. Its shares have remained steady in recent months while other UK companies, notably those in the financial sector, have slumped. As such, I see better value elsewhere.
