Rolls-Royce dividend cut prudent and credit enhancing, says Moody's

Rolls-Royce’s decision to cut its dividend for the first time in 25 years last week was prudent and credit enhancing, according to Moody’s.

On Friday, the aerospace and defence group cut its dividend by 50% to 7.1p and said it would be halved again at the next interim stage, as it reported a 12% drop in full year underlying profits that was not as bad as some had feared.

Moody’s senior vice president and lead Rolls-Royce analyst, Russell Solomon, said the decision to cut the dividend was telling.

“Rolls-Royce’s dividend cut is credit positive as it illustrates management’s conviction to adhere to historically conservative financial policies in support of maintaining a strong credit profile,” he said.

Solomon said the company’s fundamental credit story remains intact, at least for now. “The company demonstrates fairly consistent strength in operating performance over the long and volatile aerospace cycle, aided by its sizeable backlog of orders (£76bn).”

He added that strong liquidity and relatively disciplined financial policies bolster solid long-term business prospects on civil aircraft programmes.

Meanwhile, the group’s investments in new technologies, higher-margin services revenue streams and cost reduction initiatives should drive meaningful growth and boost margins and free cash flows in the next 10 years.

“The civil aerospace business is where the real action is for Rolls-Royce, though, and therein we continue to believe there is good upside to be realized after a multi-year transformational period from 2014-2018, with more meaningful appreciation thereafter.”

At 1315 GMT, Rolls shares were up 0.7% to 610.50p