Following on from a remarkable 2023 with share price gains of over 200% on an annualized basis, Rolls-Royce (LON: RR) appears to be carrying over the momentum into the new year.
The engineering, energy and aerospace giant recently declared more than doubling of its profits for 2023. Last year’s top riser on the U.K.’s FTSE 100, as well as the Stoxx 600, a pan-European index of leading companies from 17 countries on the old continent, posted an underlying operating profit of £1.6 billion ($2 billion) in 2023, compared to £652 million in 2022 on February 22, 2024.
In the five trading sessions that followed, Rolls-Royce’s shares rose by over 8% to around £3.60 ($4.56). Much of the market’s focus has since turned to, not if, but when it might resume paying dividends to its shareholders again.
The last time Rolls-Royce did so was back in January 2020 prior to the Covid-19 pandemic, sub £0.80 share prices and an narrow avoidance of bankruptcy. A lot has changed since then.
The company began shaking off the turbulence it faced after Tufan Erginbilgic, a former BP executive, took on the CEO’s job in 2023 and offered robust messaging on turning the company around.
In the fourth quarter of last year, as part of Erginbilgic’s drive, Roll-Royce announced its ambition and strategic pathways for a quadrupling of profits by 2027, triggering market chatter about a resumption of a dividend.
Is a dividend payout imminent?
Multiple investment bank analysts have expressed confidence in the company’s continued revival. These include those from Goldman Sachs, JPMorgan, UBS and Deutsche Bank. The consensus Rolls-Royce target price for many in 2024 is £4.00, a level it is not far from at the moment.
Argument is that if the company’s turnaround continues, then the dividend will likely follow. There are encouraging signs for this with aerospace and defense spending continuing at pace. Furthermore, earnings beat expectations across all Rolls-Royce divisions.
“Our strong delivery in 2023 gives us confidence in our 2024 guidance and is a significant step towards our mid-term targets,” Erginbilgic said of his company’s performance. “We are unlocking our full potential as a high-performing, competitive, resilient, and growing Rolls-Royce.”
The company forecasts underlying operating profit growth of at least 6% in 2024, putting the annual figure in the range of £1.7 billion to £2 billion, while free cash flow is expected to be between £1.7 billion and £1.9 billion.
Investment grade status before a dividend payout
Such progress puts Rolls-Royce on the path of regaining its investment-grade status with the ratings agencies. In December, Fitch Ratings upgraded the company to “BB+” with a positive outlook, bringing it a step closer to a “BBB” investment grade rating.
However, there is some way to go and Fitch assumes no dividend distribution before 2025. Rolls-Royce itself is candid enough on analysts’ calls about there being no dividend payments until its comfortably enjoying an investment grade status.
Indeed, the company has made substantial progress on reducing debt courtesy healthy free cash flows. Net debt fell to £2 billion in 2023 from £3.3 billion at the end of 2022. But it is still verging on a negative equity position, i.e. liabilities outweigh assets.
So, while it cannot be guaranteed – a post-pandemic re-starter dividend payout is highly unlikely to head the way of investors before the first or even second quarter of 2025, with a reinstatement announcement potentially later this year.