Rolls-Royce Holding PLC Halves Its Dividend, But The Shares Soar By 18%

It’s been a horrible year for Rolls-Royce (LSE: RR) shareholders, who were looking at a 42% price fall over 12 months, to 530p, as of close of play on Thursday and a drop of 60% since the shares’ recent high in January 2014.

The collapse has followed a series of profit warnings that have put the firm’s dividend under threat, and it was pretty much certain that the final payout for the year ended December 2015 would be cut — we were warned to expect it back in November. That’s now happened as Rolls-Royce has reported a 12% drop in underlying pre-tax profit, to £1,432m (with a figure of £1,355m before exceptionals, towards the bottom end of previous guidance).

Cash cut

The final payment was slashed by 50%, to 7.1p per share, taking the year’s total to 16.37p per share. Next year’s interim and final dividends are planned to be similarly cut, so for 2016 we should be seeing a total dividend of around 11.5p. That would yield only around 2%, but chief executive Warren East did say that “we intend to review the payment so that it will be rebuilt over time to an appropriate level” and commented on the board’s “confidence in the strong future cash generation of the business“.

Rolls-Royce also reiterated its plan to cut costs by around £150m to £200m per year, which includes the loss of a number of management jobs, and told us it has already identified around 50% of its targeted savings. Does this all mean the shares are good to get back into now?

Well, many were fearing a further profits warning, and there were even fears of a new share issue to raise capital. When both of those failed to materialise, investors seemed happy and pushed the share price up 18% by midday, to 625p.

I’ve no real doubt about the profitability of Rolls-Royce in the long term, but I’d still be cautious about investing in the company right now. Prior to the results, forecasts for 2016 were suggesting a further fall in EPS of more than 40%. With the company’s cost-cutting measures looking strong, I think things could turn out better than that, but we’re still looking at P/E multiples of 16 to 17 or so.

There are better bargains

That’s not bargain territory and prices the shares for an eventual recovery in earnings — and we’re going into a 2016 which, in the words of Mr East, “will be a challenging year as we start to transition products and sustain investment in Civil Aerospace and tackle weak offshore markets in Marine“.

If you’re looking at Rolls-Royce with a 10-year horizon (which we all should, really), then I reckon it’s going to be a solid investment — and dividends will almost certainly get back up to sustainably better levels. But with the irrationality of the latest FTSE sell-off, I just see better bargains out there in the shape of great companies on very low P/E ratings and with attractive dividends today.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.