Rolls-Royce (LSE:RR) shares haven’t paid a dividend since Covid-19 came onto the scene in 2020. But current City dividend forecasts suggest the engineering firm will restart its dividend policy next year.
Analysts expect the FTSE 100 firm to sustain strong earnings growth over the next three years. Annual rises of 157%, 51%, and 27% are predicted for 2023, 2024, and 2025, respectively.
This will give the business the strength to pay a 1.68p per share dividend next year, forecasters predict. A 2.69p reward is expected in 2025 as well.
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Consequent dividend yield forecasts sit at 1.1% and 1.8%, below the 3.8% forward average for FTSE shares. But forget about this for a moment. Could Rolls-Royce shares be a great buy for long-term dividend income?
On the mend
It’s no surprise that brokers aren’t expecting any sort of dividend just yet.
Disposals and restructuring in recent years have mended the balance sheet somewhat. But net debt remains considerable (£3.3bn as of December, according to latest financials) and will need to fall some way further before Rolls-Royce shares offer dividends again. This explains why the company is yet to comment on when it expects to start rewarding shareholders with cash payments again.
Yet the company’s restructuring plan is making good progress, as its plummeting net debt shows (it was £1.9bn higher at the close of 2021). Free cash flow is also positive again and tipped to range between £600m and £800m for the full year.
Continued recovery in the global airline industry is also helping Rolls’ balance sheet recovery. It’s driving demand for the engineer’s aftermarket services and showing no signs of cooling yet. On Tuesday, Ryanair, for instance, announced it carried a record 17.4m passengers in June. This was up 9% year on year.
Debt questions
The aviation sector’s rebound mean projected dividends at Rolls are handsomely covered by earnings. Coverage sits at 4.5 times and 3.6 times for 2024 and 2025. This provides a wide margin of safety for investors.
However, the FTSE firm’s debts still sit at uncomfortably high levels right now. And the firm has a lot of this to repay over the short term, casting some doubt over its ability to pay those expected dividends.
Approximately £1.3bn from a total of £4.1bn of drawn debt is due to mature by the end of 2025. And the business doesn’t have any more money-spinning disposals it can execute to get this repaid.
Any downturn in the aviation market between now and then could scupper Rolls’ ability to pay back these enormous debts. Higher-than-normal inflation and a spluttering global economy both pose a danger to the airline industry. At the same time, profits at the business are jeopardised by ongoing supply chain problems across the aerospace sector.
The verdict
Those high debts pose a threat to investor returns beyond the long term, too. Rolls-Royce’s development programmes suck up huge amounts of capital. So any funding problems might prove disastrous for company profits and dividends after 2025.
Rolls-Royce is clearly moving in the right direction. But I’d rather buy other FTSE 100 dividend shares today for long-term passive income.
