Rolls-Royce shares tank after profit warning

Shares in Rolls-Royce tanked after the aerospace and engineering firm said earnings for the year will be at the low end of guidance as it downgraded its expectations for next year and warned of a possible cut to the dividend.

The company reaffirmed its 2015 guidance but said profit for the year is expected to be at the lower of its £1.33bn to £1.48bn range.

In addition, it said profit headwinds next year could be around £650m compared to 2015. It said many of the headwinds impact higher than average margin segments of the business, or businesses where fixed costs are relatively high. As a result, the profit fall through is significant.

This marked the company’s fourth profit warning in just over a year.

Rolls-Royce said the negative outlook reflects sharply weaker demand in 2016, including in wide-bodied aftermarket, corporate and regional aerospace markets and offshore marine.

Chif executive Warren East said: "While 2015 remains broadly as expected, the outlook for 2016 is very challenging. The speed and magnitude of change in some of our markets, which have historically performed well, has been significant and shows how sensitive parts of our business are to market conditions in the short-term.

The company said that in light of its weak expectations for next year, it will undertake a review of its dividend policy and announce any changes in due course.

It also said it will will undertake a wide-ranging restructuring of the business as it looks to save around £150m to £200m a year.

"The next few years are going to be important in laying the foundations for our long-term profitable growth. Therefore it is important to ensure we are financially stronger, more resilient to short-term shocks and more flexible to take advantage of growth opportunities. My operating review has already highlighted a number of areas where I believe Rolls-Royce can make fundamental changes to its structure and ways of working that can generate material improvements to the business,” East said.

Analysts react

RBC Capital Markets analyst Robert Stallard said: “The size of the profit cut and the comments about the dividend are clearly unhelpful.”

Alex Joyner, senior analyst at Galvan Research, said: “After its worse year in a decade, punctuated by multiple profit warnings, today’s news of £650m ‘headwinds’ will do little to reassure long-term investors.”

He pointed out the company is already worth 40% less than two years ago and it looks like the shares have still got further to fall.

“Warren East’s cost-cutting plans suggest he knows what needs to be done, but will it be enough to stem the bleeding?”

Elsewhere, Hargreaves Lansdown analyst Keith Bowman said the review of the current shareholders payments policy was a major negative.

“In all, the company’s prior push to reduce earnings volatility and surprises looks to have been completely unwound, with investors today suffering another major setback,” he said.

Atif Latif, director of trading Guardian Stockbrokers, said the issue of the dividend was a concern.

“Historically this was one of the main reasons to own the shares and arguably with this now in doubt management now have to convince the market where, even with significant cost savings, the upside growth will be.”

At 1253 GMT, Rolls-Royce shares were down 22.4% to 517.47p.