The Rolls-Royce (LSE:RR) share price was hammered on Thursday as it fell over 18% on the news of CEO Warren East stepping down after nearly seven years at the helm, and showed only a small rebound on Friday morning. The FTSE 100 engine manufacturer has not only had a bad week but a bad three years, with the share price down 68% from February 2019.
Is the share price overreacting?
Some positives can be taken from the recent earnings report that show some hope for the Rolls-Royce share price. A major restructuring programme, undertaken by the departing CEO, saw a streamlining of operations with 9,000 jobs cut and unnecessary costs eliminated. This restructuring has helped Rolls-Royce turn a £4bn loss in 2020 to a small but important £124m profit in 2021.
The company has cut down on its cash-intensive operations and costs and saw only £1.5bn in cash leave the company in 2021 compared to a massive £4bn the year before. This strengthening of cash flow makes the company less reliant on taking on further debt to finance current operations and will boost future financial health.
Rolls-Royce’s power-by-the-hour business model, where airlines pay a flat rate per hour flown with Rolls-Royce engines, has harmed the company during the pandemic, with large fleets of grounded jets. However, as the travel industry prepares for a summer with loose travel restrictions, the skies will be filled once again and Rolls-Royce will be the recipient of a steady stream of income.
Further turbulence ahead for Rolls-Royce?
Rolls-Royce was forced to take on over £7bn in debt over the pandemic and sees current debt at £5.2bn, which is no small sum. As a term of some of the loans taken, Rolls-Royce is not allowed to pay a dividend until at least 2023 and I wouldn’t be expecting one until at least 2025 considering current financial instability. As a result, there are other FTSE 100 shares I’m turning to when I’m looking to boost my dividend income stream.
The news of CEO Warren East stepping down at the end of the year understandably harmed the Rolls-Royce share price, and it could suggest some deeper concerns for the FTSE 100 giant. East trimmed down costs and made the company profitable but is now jumping ship — this could indicate a lack of direction in the senior management team.
Am I investing today?
I believe that the drop in the Rolls-Royce share price has been a slight overreaction but there are still legitimate concerns about the health of the company. The restructuring efforts, positive earnings report and a good summer for air miles all indicate brighter skies ahead.
Despite all this, I am only adding Rolls-Royce to my watch list considering the shifts in leadership, high debt, and absence of a dividend. I believe the risks outweigh potential opportunities at this moment in time.
