Rolls-Royce halves dividend as profits fall 12%

As well as dismissing the need for a rights issue, Rolls-Royce cut its final dividend by 50% to 7.1p and said it would be halved again at the next interim stage, though full year underlying profits did not fall as far as some feared.

Following a string of five profit warnings in the last two years, the engine maker delivered results largely in line with guidance from last summer, with revenue down 1% to £13.4bn and underlying pre-tax profit falling 12% to £1.43bn at constant exchange rates. The consensus profit forecast pointed to a sharper fall to just over £1.3bn, the lower end of the company’s guidance.

Earnings per share were down 10% at the underlying level to 58.7p.

Further lifting the mood, the FTSE 100 company kept its trading outlook for 2016 unchanged and said it had identified half of the cost savings it needed to make in order to help ease the cash crunch.

Free cash flow for 2015 shrank by more than 250% to £179m, much higher than feared in the third quarter thanks to strong cash collections at the end of the year from several key customers, a better than expected overall working capital performance and a £58m non-recurring cash settlement arising from an intellectual property agreement.

New chief executive Warren East expects to make £145m of annualised cost savings by the end of 2017, with more to come, though in 2016 the company will take an initial exceptional restructuring charge of £75-100m.

"In the context of challenging trading conditions our overall performance for the year was in line with the expectations we set out in July 2015," he said, reflecting on a year of turmoil for management, market conditions and near-term outlook.

But he pointed to 4% growth in the order book as a factor that provided confidence that the company can continue to grow market share in Civil Aerospace while marine markets remain weak.

The marine share of revenues shrank 16%, with defence and power systems also down 5% and 3% respectively, though civil aerospace, by far the largest segment, swelled 3%.

Underlying marine profits before financing fell 94% as gross margin was crunched, with lower volumes and higher restructuring costs only partially offset by cuts to commercial and administration costs.

The marine outlook remains "challenging" for 2016 due to reduced demand in offshore oil and gas markets, though two restructuring programmes launched last year are expected to bring benefits from 2016 onwards.

Although profits in power systems, another area of concern, fell 15%, the outlook for this year is said to be positive, with a solid closing order book of £1.9bn and long-term plans for research and development investment in order to increase cost competitiveness in higher volume engine applications.

On the dividend, East added: "Subject to short-term cash needs, we intend to review the payment so that it will be rebuilt over time to an appropriate level. This reflects the board's long-standing confidence in the strong future cash generation of the business."

Later, chief financial officer David Smith said there is no need for any rights issue and confirmed that 2016 final dividend was under review.

The company also guided to a further increase in the tax rate to 26% and an increase in interest charges, which will both hit the bottom line.

Analyst opinion

Investec said the results were better than reduced expectations but due to one-offs including a £189m benefit in commercial aerospace for long term contract accounting, a £40m benefit in defence related to changes to scope and contract variations, the intellectual property settlement, and a £19m R&D tax credit in nuclear.

"Whilst the initial pages of the statement read positively, there are a series of concerning details in the increased divisional disclosures, including lower H2 order intake in Power Systems and guidance for increased costs at Defence and Nuclear. Our view remains that the premium valuation does not reflect a series of medium and long term challenges to profits and cash."

With shares down 43% since last May, the maintenance of 2016 guidance and no talk of a rights issue is "probably even considered the real news", said Mike van Dulken, as it would appease the fearful loyal investors "who are no doubt upset at the reduction to income despite it being necessary in the current troubled economic environment and designed to safeguard long term returns".

Steve Clayton at Hargreaves Lansdown added that there was hope for shareholders, who "might have felt more like they were at the wheel of a Lada" than a Rolls.

"Rolls Royce has a huge order book, but cannot translate this into reliable earnings at the moment. If new CEO Warren East can successfully restructure the business into a shape fit for purpose, there could be upside. But the concern must be that it will take so long that by the time it can be seen to have worked, the market for civil aerospace will have turned down."

Shares in Rolls-Royce topped 600p for the first time since December and just before 1100 GMT were up more than 14% at 604.61p.