As the Rolls-Royce share price soars, are we looking at a future dividend star?

From a 10-bagger for the Rolls-Royce share price, to paving the way for long-term dividends… is that what we’re seeing here?

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The Rolls-Royce Holdings (LSE: RR.) share price has skyrocketed even higher in 2024, up nearly 85% year-to-date.

We’re looking at a huge 940% rise since 2020’s low. From a company we feared could go bust, we’re now seeing a 10-bagger for those who got in at the right time.

But does it come as a surprise that Rolls-Royce could post the biggest dividend rise in the whole FTSE 100 this year in cash terms?

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Created with Highcharts 11.4.3Rolls-Royce Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Dividend stars

That’s what AJ Bell‘s latest Dividend Dashboard, a regular look at the FTSE 100’s dividend stars, suggests.

It found an analyst consensus for a £452m hike in ordinary dividend payments this year.

Admittedly, that’s coming off a very low base last year. Well, a base of zero to be precise, with no payout at all. And on the current share price, it would mean a dividend yield of only 1%.

But I still see it as a stunning turnaround. And if forecasts are to be believed, the yield could be up to 1.5% by 2026. With cover by earnings put at 2.8 times by then, there could still be a lot more to come.

I’d thought Rolls could take a good few years to get its debt back to a comfortable level. And a fair bit longer before we could even start to think about dividends.

Debt challenge

Under new boss Tufan Erginbilgiç, Rolls has tackled the debt challenge head on, and looks to be winning.

At H1 time, net debt was down as low as £0.8bn, as the firm posted operating cash flow of £1.7bn.

At the end of 2021, that debt figure had stood at £5.2bn, including leases. Even excluding leases, it was as high as £3.4bn.

Getting it down so far, so fast, is one of the most impressive FTSE 100 management achievements I think I’ve seen in a very long time.

So, my fears about Rolls-Royce’s possible demise have evaporated. The company’s performance, and the share price rise, have blown my socks off.

A dividend buy?

But I won’t be buying.

It’s not that I think Rolls-Royce is necessarily overvalued. The forward price-to-earnings (P/E) ratio is up above 30. But it could drop to 23 based on 2026 forecasts.

And if the growth outlook remains strong, that could still be fair value. I do, however, see more risk in a valuation like that than I need to take right now.

Even if we’re in for a run of dividend rises, they can never be guaranteed. That applies to well-established dividends, never mind ones that are still only in the minds of forecasters.

I do invest for dividends, but there’s almost an embarrassment of high yields out there. I’d rather put more cash into the 7.1% forecast from Aviva, or even go for the 9.8% at M&G.

A word from the wise

Finally, I never forget one of ace investor Warren Buffett’s most famous pieces of wisdom. He said it’s best “to be fearful when others are greedy and to be greedy only when others are fearful“.

I wouldn’t want to be holding if today’s bullish sentiment should change.

But here’s another bargain investment that looks absurdly dirt-cheap:

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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 positions in Aviva Plc. The Motley Fool UK has recommended Aj Bell Plc, M&g Plc, and Rolls-Royce Plc. 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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