Over the past two years, Rolls-Royce (LSE:RR) shares have surged 540%! Just let that sink in. A £10,000 investment during the ill-fated Liz Truss premiership would be worth £64,000 today.
But there’s a little more good news for Rolls-Royce shareholders, and it means investors don’t need to sell their shares to realise their returns on the stock.
In the company’s results for the first half of the year, management said it was looking to reinstate its dividend with more information to be shared in the full-year results.
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So, what could this dividend look like?
The dividend forecast
Rolls-Royce hasn’t paid a dividend for four years, so investors shouldn’t expect anything too exciting from the civil aviation and defence giant.
Based on analysts’ projections, the forecasts are as follows.
| 2024 | 2025 | 2026 | |
| Dividend | 5.3p | 6.3p | 8.1p |
| Dividend yield | 1.1% | 1.27% | 1.63% |
| EPS | 17p | 19.6p | 22.6p |
The forecasts suggest that the dividend will increase modestly throughout the medium term, with a payout ratio of just under 33%. That’s a very safe ratio. And while it’s great to see the dividend return, this yield isn’t groundbreaking.
In short, I wouldn’t expect anyone to go out and buy Rolls-Royce stock for the dividends. However, even a percent or two can contribute to our broader investment goals. It’s certainly nothing to be sniffed at.
What about the business as a whole?
As the EPS forecasts suggest, Rolls-Royce is a business experiencing significant earnings growth. Two years ago, this would have seemed almost impossible to some investors and analysts — the company really seemed down and out.
Under new management, Rolls-Royce has become a much leaner and more profitable beast. And these changes have been complemented by supportive trends in civil aviation and defence. This is evidenced by recent results. In 2023, the group’s return on capital more than doubled, reaching 11.3%, while net debt decreased to £2bn, down from £3.3bn at the close of 2022.
In civil aviation, Rolls-Royce reported that long-term service agreement large engine flying hours (EFH) have returned to 100% of 2019 levels in the four months to April 30, 2024, driven by the continued recovery of international traffic in Asia and Rolls-Royce’s growing fleet. The company has also secured new widebody business wins, including orders from VietJet, Starlux, and IndiGo.
Meanwhile, Vladimir Putin’s war in Ukraine has seen governments around the world commit to new military procurement programmes. As a major supplier of propulsion systems for the sector, the company has registered an uptick in demand.
What’s the drawback?
Like any investment, there’s always a risk. Some investors, and a small minority of analysts, are concerned that the stock is simply getting too expensive. At 30 times forward earnings, it’s not cheap compared to the FTSE 100 average — around 13 times.
Investors are putting a lot of emphasis on the stock’s growth potential. If earnings growth starts to slow, the stock could plummet.
However, noting the price-to-earnings growth ratio of 1.03 and the incredible moat, I’m still bullish on Rolls-Royce, as are many analysts.
