Until several years ago, one of the attractions of owning shares in Rolls-Royce (LSE: RR) was the engineering firm’s dividend. But at the moment it remains cancelled. Could the Rolls-Royce dividend make a comeback next year – and is that enough reason for me to buy more shares in the company?
Rolls-Royce dividend outlook
There are a couple of reasons why there is no Rolls-Royce dividend being paid at the moment.
The first reason is that the company is contractually not allowed to make such payments. During the pandemic, it borrowed money to boost its liquidity. As part of that deal it agreed to certain terms, including not paying dividends until the end of 2022. It may be able to restart payouts in 2023, but that depends on it meeting certain criteria. Those criteria are known to Rolls-Royce and its lenders but are not public information.
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But another reason there is still no dividend, in my view, is that the business performance has not been strong enough to support it. Even if Rolls-Royce had been allowed to pay a dividend last year, I do not think it would have. Post-tax profit of £121m was a much better performance than the previous year’s loss of £3.2bn. But it was still small relative to the company’s historical performance. I do not think it would have been prudent for Rolls-Royce to restart dividends simply on the basis of making a £121m profit.
The business seems to be in recovery mode, though. It is profitable and generating free cash flow too. In May, the firm said it continues to expect positive momentum in its financial performance this year. As civil aviation demand globally recovers closer to pre-pandemic levels, I expect revenues and profits to increase. Uneven recovery in some regions remains a risk, though. That may mean that both revenues and profits remain subdued for some years, compared to before the pandemic.
Buying for the dividend
The Rolls-Royce dividend used to be attractive. I am hopeful that it will be restored, perhaps as soon as next year even if only at a token level. That would be a welcome sign of management confidence that the business turnaround continues to progress well.
However, with so many high income stock opportunities in the market right now, I would not buy Rolls-Royce shares for my portfolio just for the prospect of future dividends.
It is also worth remembering that, as part of its efforts to boost liquidity in 2020, the company issued a large number of shares. So even if it can hit its old profit levels again, they will need to stretch across more shares when it comes to paying dividends. That could well mean a lower dividend per share than used to be paid.
My next move
Although I would not buy it just for its dividend, I do see an investment case for Rolls-Royce. Its long-term prospects look good to me, thanks to a large installed customer base, strong reputation, and high barriers to entry in the industry.
I will continue to hold the shares for now and, while they trade in pennies, would consider adding more to my portfolio.
