Why isn’t anyone talking about the dividend forecast for Rolls-Royce shares?

The recent surge in the Rolls-Royce share price has captured the headlines. But nobody’s discussing the dividend forecast. I wonder why.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest £1,000 in Legal & General right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Legal & General made the list?

See the 6 stocks

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%.

Created with Highcharts 11.4.3Rolls-Royce Plc PriceZoom1M3M6MYTD1Y5Y10YALL19 Jan 201926 Apr 2025Zoom ▾202020212022202320242025202020202022202220242024www.fool.co.uk

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.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

British coins and bank notes scattered on a surface
Investing Articles

3 cheap FTSE 250 stocks with big dividends to consider buying right now

The FTSE 250's loaded with so many big dividend yields it's hard to know where to start. These three have…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

Up 585%, could Rolls-Royce shares still go higher?

Christopher Ruane likes the Rolls-Royce business but is not so convinced by the value its current share price offers him.…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

I reckon a bull market’s coming! Here’s what I’m buying for my Stocks and Shares ISA

Hoping to capitalise on what he believes is an undervalued UK stock market, our writer’s added more of this FTSE…

Read more »

piggy bank, searching with binoculars
Investing Articles

The UK stock market looks undervalued to me. Here’s 1 growth stock to consider for a SIPP

Our writer explains why he thinks the UK stock market’s currently in bargain territory, and identifies one share potentially worthy…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Meet the FTSE 100 stock I’ve been buying this week

Despite a strong week for the FTSE 100, one stock fell 7% in a day. And Stephen Wright took the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

1 of my favourite growth stocks crashed 20% in a day this week. Here’s what I’m doing

Stephen Wright thinks the market’s overreacting to short-term growth challenges in one of his favourite UK stocks, creating a buying…

Read more »

Young female hand showing five fingers.
Investing Articles

Here’s a 5-stock high-yielding portfolio that could generate passive income of £1,500 a year

Those wanting to earn generous levels of passive income from their Stocks and Shares ISA could take a closer look…

Read more »

Black woman using smartphone at home, watching stock charts.
Investing Articles

2 of the best FTSE 100 bargain shares to consider today!

These FTSE-quoted shares are among my favourite UK value shares to consider today. Give me a few minutes to explain…

Read more »