The stock market is home to many an attractive dividend share. Some offer big yields, often backed up by good earnings cover. Others have been raising their cash payouts for years. And some can offer all three.
In the recent past, investors have rated Rolls-Royce Holdings (LSE:RR.) among them. A decade ago, Rolls shares paid 3%. And as recently as 2015, the dividend yield topped 4%. And it was around three times covered by earnings.
In another decade, could Rolls be back up among its dividend-paying FTSE 100 peers? Stranger things have happened.
We’ve just seen something unexpected, in fact. On 23 February, the Rolls-Royce share price jumped 24%. At the time of writing, Rolls shares have reached 140p. And that’s a long way from their 52-week low of 64.4p.
FY Results
It was all down to full-year results, which provided shareholders with a pleasant surprise. As a dividend investor, I liked one thing in particular.
Net debt dropped from £5.2bn a year ago, to just £3.3bn. The bulk of that did come from cash generated by disposals. But debt just doesn’t look so potentially crippling now, especially as the market-cap has reached £12bn.
Forecasts actually suggest a dividend in 2024. It would yield less than 1% though. So what am I looking for in my hope that Rolls will get back to paying something more substantial? It’s all about cash.
Encouraging progress
In the coming years, operating cash flow will need to take over from disposals, to fund further debt reductions. Eventually, it could lead to surplus capital for the company to distribute to shareholders.
I thought 2022 results showed some very encouraging signs. In particular, I was buoyed by the board’s outlook for 2023.
Rolls expects operating profit of £0.8bn to £1bn for the current year. That would be an impressive return to profits sooner than I was expecting. But more importantly, the company expects it to translate to free cash flow of between £0.6bn and £0.8bn.
Improving cash flow
New chief executive Tufan Erginbilgic is aiming to shake things up further, speaking of improved efficiency and a “sustainable reduction in working capital“.
Rolls is also now talking about delivering “materially higher profit, cash flows and returns“. Oh, and “growing shareholder returns“. There was no talk of dividends specifically. But I’m optimistic that they’re at the back of the new boss’s mind.
And if free cash flow could potentially soon be nudging £1bn per year, that net debt figure could start to look a lot less of an impediment.
Dividends?
Clearly there’s still a lot for Rolls-Royce to do as it progresses with its transformation. And that brings risk along the way, risk that any individual investor needs to consider before deciding whether to buy.
And my talk of returning dividends is really just speculation. I think it’s speculation backed by sound reasoning though. And I do think these latest results support the possibility.
But yes, a decade from now, I reckon Rolls-Royce stands a good chance of being seen as a top dividend share again.
