Rolls-Royce shares break record on results and dividend joy

Rolls-Royce Holdings (LSE:RR.) shares touched £5 for the first time today after the engine giant’s “beat and raise” first-half results were topped off with a pledge to resume dividend payments.

The latest milestone in the turnaround led by chief executive Tufan Erginbilgic left the resurgent FTSE 100 stock up 49.5p to 499.1p by midday, having peaked at 502p in early dealings.

This is a company that in November 2020 offered existing investors the opportunity to buy shares at 32p in a £2 billion rights issue and last paid a dividend in January 2020, when it distributed £92 million via an interim award of 4.6p a share. 

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The shares jumped 220% in 2023 and are up by another two-thirds so far in 2024 as the company continues to show significantly improved cash flow across all its divisions.

Source: TradingView. Past performance is not a guide to future performance.

The new-found resilience of the balance sheet means Rolls is in a position to declare a payout equivalent to 30% of post-tax underlying profit when it presents February’s 2024 results. It then intends to target an ongoing payout ratio of 30-40% each year. 

As well as today’s dividend boost for shareholders, the company’s sharply higher first-half operating profit of £1.15 billion beat City expectations by 27%. Earnings per share rose 82% on the previous year to 8.95p, compared with the consensus forecast of 6.6p.

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Given this performance, Rolls now expects 2024 operating profits between £2.1 billion and £2.3 billion and free cash flow in the region of £2.1 billion and £2.2 billion. This compares with previous estimates of £1.7 billion-£2 billion and £1.7 billion-£1.9 billion respectively.

Erginbilgic said the upgrades flowed from strategic initiatives and a “relentless focus” on commercial optimisation and cost efficiencies across the group.

The former BP executive added: “Our transformation of Rolls-Royce into a high-performing, competitive, resilient, and growing business is proceeding with pace and intensity.”

Among the divisional highlights, a 5.6 percentage point improvement in the civil aerospace operating margin to 18% beat City hopes that had been nearer to 16.5%. The 7.6 million of large engine flying hours also takes Rolls to 101% of pre-pandemic 2019 levels.

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In its next biggest division of defence, the adjusted earnings figure of £345 million topped consensus by 20.5%. The result for power systems also beat hopes but by a smaller margin.

Shore Capital described today’s results as a “material” beat and raise, which it expects will result in it lifting its operating profit forecasts for coming years by 17-28%.

UBS, which had a price target of 550p prior to today’s results, notes that the revised 2024 guidance is equivalent to 75% of 2027 profit and 65% of free cash flow targets.

As there’s no change in 2027 guidance, it expects questions of management on whether today’s update sends a signal that 2027 targets carry upside, as bulls argue.