For many years, shareholders of aeronautical engineer Rolls-Royce (LSE: RR) received regular dividends. Those days seem like a distant memory now. But could the Rolls-Royce dividend be coming back?
Ability and funds
When it comes to dividends, investors understand that it takes money to pay them. A company that wants to pay out dividends consistently needs to make profits. While Rolls-Royce did make a modest profit of £124m last year, that followed £6.8bn in total losses across the preceding three years.
But to pay dividends, a firm also needs the ability. It might not be able to pay out even if it wants to, for example because of loan conditions. Creditors may put a block on dividends when lending because they want to keep money inside a business to increase the chance that their loan will be repaid.
That has been the situation at Rolls-Royce. But, subject to certain conditions being met, it is now free to pay dividends out if it so chooses.
Dividend forecast
So, with the firm’s final results due to be published next week, ought I to be rubbing my hands in anticipation of the dividend being brought back?
I do not think so.
Despite making a profit last year, the company fell back into the red in the first half, reporting a £1.6bn loss.
Since then there have been some positive developments that could help the full-year numbers, such as an increase in the number of large engine flying hours operated by the firm’s customers. But I do not think Rolls-Royce will be in a strong enough financial position to offer even a token dividend to shareholders.
On top of that, the firm’s new chief executive has essentially warned of an existential crisis facing the firm. I do not care for his alarmist language. But I think it suggests that a dividend is unlikely to be the short-term priority. I now expect to receive no Rolls-Royce dividends before 2024 at the earliest.
Slow and sure
That does not bother me, as I think it could be the right thing for the business. As a long-term investor, getting the business into healthy shape should serve my ultimate interests.
The company has made strides in paying down debt and improving its balance sheet. But it continues to have substantial borrowings at a time of rising interest rates. On top of that, with the company’s global installed base of large engines still seeing less use than before the pandemic, there is work to be done to lift revenues further.
If the company can stay focused on improving business performance and profitability, I think that may serve my interests as a shareholder more than declaring a dividend. If it is successful, an improved business could fund the return of the Rolls-Royce dividend at some point. I remain hopeful that will happen, but I do not expect it any time soon.
