In 2023, Rolls-Royce (LSE:RR.) shares were the best performing on the FTSE 100. As a consequence, there’s been plenty of speculation as to whether the rally can continue. But as an income investor, it’s the dividend forecast that interests me most.
The company last paid a dividend (4.6p a share) in January 2020. That was an interim payment, just before the global aviation industry was devastated by the pandemic.
The good old days
Not so long ago, investors held the stock for its generous payouts, rather than its growth potential.
For example, in 2015, it paid shareholders 23.1p.
At the end of that year, the share price was 197p — around a third lower than it is today. Its shares were yielding nearly 12%.
But things have changed since then.
To survive Covid, Rolls-Royce had to raise some cash. Part of its fundraising involved the issue of new shares.
The engineering giant now has 8.417bn shares in circulation. At the end of 2015, the figure was 1.838bn. And this huge increase has major implications for the dividend forecast.
In 2015, the dividend cost around £425m.
Today, it would require cash of £1.94bn.
That’s nearly twice as much as the company’s expected free cash flow for 2023, of £1bn. A payout of this level is clearly not sustainable.
Expert opinion
Rolls-Royce regularly surveys analysts covering its stock. The average (median) forecast for the dividend, in respect of its 2023 financial year, is nil.
That’s not surprising given that it’s restricted by some of its loan covenants from making shareholder distributions.
However, if the ‘experts’ are correct, the company will pay a dividend for its 2024 financial year of 1.8p, at a cost of approximately £152m.
This implies a miserly current yield of 0.6% — the average for the FTSE 100 is 3.9%.
More positively, a return of 4p is expected for 2025. This would cost the company around £337m.
The most optimistic forecast is for 4.9p and 6.7p, in 2024 and 2025, respectively. Although, I must point out that at least one analyst isn’t expecting any payouts, for either of these years.
Different times
It appears to me that the days of Rolls-Royce shares offering a double-digit yield are long gone. And unlikely to be repeated.
That’s because of the large increase in the number of shares in issue.
Even if the company returned the same amount to shareholders as it did in 2015 (£425m), the dividend per share would only be 5p. This would give a current yield of 1.7%.
For 2024, the company’s expected to report earnings before interest and tax of £1.7bn, compared to £1.5bn, in 2015.
Even though its financial performance is likely to be better than it was nine years earlier, its dividend is expected to be a lot lower.
I’m sure that’s why very few investors appear to be discussing the Rolls-Royce dividend forecast. When it’s eventually reinstated, it doesn’t look like the return to shareholders is going to be big enough to get anyone excited.
