Rolls-Royce, the renowned British aero engine manufacturer, has announced plans to reinstate dividend payments for the first time since the COVID-19 pandemic, marking a significant milestone in its recovery. The news comes as part of a broader update on the company’s financial performance and outlook, which has sent its shares soaring to unprecedented levels.
On Thursday, Rolls-Royce revealed a substantial increase in its profit and cash flow forecasts for 2024, reflecting the success of Chief Executive Tufan Erginbilgic’s aggressive turnaround strategy. The company’s shares responded enthusiastically, jumping 11% to reach a record high of 501 pence.
In a bold move that surpassed market expectations, Rolls-Royce has raised its operating profit forecast for 2024 to up to 2.3 billion pounds (USD 2.95 billion), an increase of 300 million pounds from its February estimate. This projection significantly outperforms analysts’ predictions, underscoring the rapid progress of the company’s transformation efforts.
Erginbilgic, who joined Rolls-Royce in January 2023 after a career at BP, emphasised that the company’s transformation is proceeding with “pace and intensity.” The CEO’s comments highlight the urgency and effectiveness of the measures implemented since his arrival.
The decision to reinstate dividend payments is particularly noteworthy, as Rolls-Royce had suspended them in 2020 when the global aviation industry ground to a halt due to the pandemic. The company, which is the exclusive engine partner for Airbus’s widebody planes and a key supplier to Boeing 787, plans to initiate dividend payouts at 30% of underlying profit after tax, starting with the full-year 2024 results.
Rolls-Royce’s first-half performance for 2024 has been impressive, with underlying operating profit surging to 1.15 billion pounds, up from 673 million pounds in the same period last year. The civil aerospace division emerged as a standout performer, with flying hours rising above pre-pandemic levels and the delivery of 120 large engines, an increase from 115 in the previous year.
The company’s operating margin also saw significant improvement, rising by 4.4 percentage points to 14%. The civil aerospace unit, in particular, demonstrated strong profitability with an operating margin of 18%.
Despite these positive developments, Erginbilgic acknowledged ongoing challenges in the supply chain, which are expected to cost the company between 150-200 million pounds this year. He cautioned that these issues could persist for another 18-24 months, highlighting the need for proactive management.
To address future challenges and maintain its competitive edge, Rolls-Royce is investing 1 billion pounds in improving the durability and efficiency of its engines, with a particular focus on performance in hotter climates such as the Middle East.
The company has also raised its forecast for free cash flow in 2024 to 2.1-2.2 billion pounds, up from the previous estimate of 1.7-1.9 billion. This increased financial flexibility further supports the decision to reinstate dividend payments.
Analysts at Jefferies noted that Rolls-Royce had exceeded expectations on both profit and cash flow, even in the face of rising market anticipation ahead of the results announcement. The strong performance across all key metrics, particularly in the civil aerospace sector, has bolstered confidence in the company’s recovery trajectory.
As Rolls-Royce continues to navigate the challenges of the post-pandemic aviation landscape and global supply chain disruptions, the company’s latest financial results and forward-looking projections suggest that Erginbilgic’s turnaround plan is gaining significant traction. The reinstatement of dividends, coupled with record-breaking share prices, signals a new chapter of growth and investor confidence for this iconic British manufacturer.