Long-term owners of Rolls-Royce (LSE:RR) shares haven’t received a dividend since before the Covid-19 crisis began in 2020. But City analysts believe all this could be about to change.
What’s more, they expect the FTSE 100 stock to deliver rapid dividend growth once it starts supplying passive income again.
The engineer isn’t tipped to pay any cash rewards in 2023 as balance sheet repairs roll on (there may also be loan-related restrictions that prevent it from paying a dividend for this year).
However, Rolls shares are finally expected to provide dividend income from next year, as the table below shows.
| Year | Dividend per share (f) | Dividend yield |
|---|---|---|
| 2024 | 2.52p | 0.9% |
| 2025 | 2.86p | 1.3% |
But how realistic are current dividend forecasts?
Robust recovery
A recovery in the global airline sector has driven profits growth at the engineer of late. Rolls makes almost half of its total sales from the servicing of large engines on long-haul aircraft, so continued strength here is essential for future dividends.
Encouragingly City analysts expect Rolls-Royce’s bottom line to continue rising beyond this year. Annual earnings growth of 29% and 27% isarecurrently tipped for 2024 and 2025, respectively.
Such bullishness is perhaps no surprise as major airlines continue to report robust trading. For instance, Delta Air Lines — the world’s biggest operator by revenues — recently reported record Thanksgiving revenues and advised of “very, very strong” Christmas bookings.
Mixed picture
Rolls-Royce’s outlook is further helped by impressive restructuring under new chief executive Tufan Erginbilgic. Indeed, it announced plans to reduce costs by another £400m-£500m just last month.
All of this means that expected profits comfortably cover the dividends that City brokers have forecast. Dividend cover sits at 5 times for 2024 and 4.1 times for 2025. A reading above 2 times provides investors with a wide margin of safety.
That said, dividends can never be guaranteed for any UK share. And there are some significant headwinds that could still throw the dividend forecasts for Rolls shares wildly off course.
One is a sudden, unexpected slump in air travel. While the industry appears in rude health today, a sharp slowdown in the global economy could play havoc with passenger demand and leave Rolls’ profits recovery in tatters.
Should I buy the shares?
It’s also important to remember that the company also still has large financial liabilities (net debt was £2.8bn as of June, much of which is due in 2024 and 2025). Worsening trading conditions would compromise its ability to do this.
And Rolls-Royce is laser-focused on continuing to mend its balance sheet too, even if this comes at the expense of dividends. In November it reiterated plans to only start paying dividends again “once we have strengthened the balance sheet”.
It added too that “we will optimise between shareholder distributions and further investing in the business” beyond that point. This could be a major constraint on dividends given how capital intensive Rolls’ operations are.
The firm’s recovery from the pandemic has been very impressive. But I still have major doubts about future profits, its balance sheet and the level of future dividends. For this reason I’m happy to buy other FTSE 100 stocks for 2024.
