Rolls-Royce is poised to cut its dividend payment to shareholders for the first time in almost 25 years, underlining the crisis at the famous engineering group.
The dividend cut will be a blow to Britain’s leading pension funds, who are amongst the biggest shareholders in the FTSE 100 company.
Rolls has issued five profit warnings in the last two years and Warren East, chief executive, is likely to warn there are more struggles ahead when he unveils the engineer’s full-year results this week.
The company makes engines for the Airbus A380 superjumbo, the Eurofighter Typhoon fighter jet, and the Boeing 787 Dreamliner. It also builds the nuclear-powered propulsion system for Britain’s submarines and parts for ships.
However, the company has been hurt by cuts to defence spending by western governments, a fall in demand for corporate jets, and a slump in the oil price, which has meant Rolls’ customers in the energy industry are investing less.
Rolls is also paying the price for its decision to pull out of the market for single-aisle aeroplanes. The demand for smaller planes is growing quickly, while orders of larger planes such as the A380 have slowed.
East has already revealed that he wants to cut costs by up to £200m a year to get the company back on track. Senior executives have left, while 50 out of the company’s 200 managers will lose their job.
The cut to the dividend will further help to shore up Rolls’ balance sheet. Last year the company paid almost £500m to shareholders with a dividend worth 23.1p per share. The last time Rolls cut its dividend was in 1992 as the UK fell into a deep recession.
However, it is understood that Rolls is not considering a rights issue as a way to boost its funding.
The pressure on Rolls has been increased by ValueAct, an activist investor based in California, building a 10% holding in Rolls and pushing for a seat on the board. Rolls is also mired in a Serious Fraud Office investigation about bribery allegations in China, Indonesia and other parts of the world.
Analysts fear that Rolls could also warn on profits for a sixth time in its results. The consensus in the City is that Rolls will post underlying pre-tax profits of £1.3bn for 2015, down 20% on the previous year and below the company’s guidance of £1.325bn to £1,475bn.
However, 2016 could be much worse, with analysts predicting pre-tax profits will almost halve to £673m.
Jaime Rowbotham, analyst at Morgan Stanley, said: “While civil [aerospace] issues are well flagged, continued weakness in power systems and marine means a risk of more disappointment. As a result, it is hard to establish a sustainable level of future profit for Rolls and when that might be achieved.”
This article was written by Graham Ruddick, for theguardian.com on Sunday 7th February 2016 11.47 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010